DOD Competitive Sourcing: More Consistency Needed in Identifying
Commercial Activities (Letter Report, 08/11/2000, GAO/NSIAD-00-198).

Pursuant to a congressional request, GAO provided information on the
Department of Defense's (DOD) efforts to identify functions that could
be studied for potential competition between the public and private
sectors, focusing on: (1) whether DOD has improved the identification of
commercial activities that could be studied under Office of Management
and Budget Circular A-76; and (2) the likelihood that DOD will increase
the number of functions and positions studied under A-76.

GAO noted that: (1) DOD has improved the identification of commercial
activities that could be studied under A-76; (2) in its 1998 Defense
Reform Initiative inventory, DOD components identified over 283,000
commercial positions--81,000 more positions than had been identified
previously; (3) DOD's 1999 Federal Activities Inventory Reform Act
inventory, which built upon the Reform Initiative inventory, identified
commercial functions and activities involving over 300,000 civilian
positions, excluding military personnel that had been included in the
1998 Reform Initiative inventory; (4) both inventories are viewed by DOD
and Office of Management and Budget officials as having improved the
quality and consistency of DOD's data on commercial activities; (5)
however, GAO's analysis suggests that the military services and Defense
agencies did not always consistently categorize similar activities, in
part because of the lack of clear guidance on how to identify which
activities are inherently governmental, commercial and exempt from
competition, and commercial and eligible for competition; (6) although
some inconsistencies are likely to continue to exist, their resolution
could lead to more activities, or fewer, being identified as eligible
for A-76 study; (7) the number of commercial functions and associated
positions contained in the inventories will likely change over time
based on iterative improvements DOD plans to make to the inventory
process and guidance; (8) in addition, DOD's manpower and business
process reengineering initiatives and changes in the Defense components'
missions and operations could result in changes to the numbers of
commercial functions and associated positions in the inventories; (9)
DOD does not expect to significantly increase the number of functions
studied under its A-76 program based on the identification of additional
positions in functions eligible for competition; and (10) several
factors, such as geographic dispersion of positions and the inability to
separate commercial from inherently governmental activities, may prevent
DOD from developing studies for competition under A-76.

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

 REPORTNUM:  NSIAD-00-198
     TITLE:  DOD Competitive Sourcing: More Consistency Needed in
	     Identifying Commercial Activities
      DATE:  08/11/2000
   SUBJECT:  Defense procurement
	     Human resources utilization
	     Privatization
	     Cost effectiveness analysis
IDENTIFIER:  OMB Circular A-76 Program
	     DOD Defense Reform Initiative Directive 20
	     DOD Defense Reform Initiative

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GAO/NSIAD-00-198

Appendix I: FAIR Act Challenges and Appeals

24

Appendix II: Objectives, Scope, and Methodology

32

Appendix III: DOD's DRID 20 Inherently Governmental and
Commercial Activities Inventory Codes

34

Appendix IV: Comments From the Department of Defense

37

Table 1: Summary of DOD FAIR Act Challengers 25

Table 2: DOD FAIR Act Challenges, Appeals, and Decisions 26

Table 3: FAIR Act Challenges by Military Services, Defense
Agencies, and DOD-wide 28

Table 4: Responses to Challenges by Basis for Decision by
Component 30

Table 5: 1998 DRID 20 Inventory by Functional Group 36

Figure 1: DRID 20 Inventory of All DOD Functions and Associated Positions
Categorized as Either Inherently Governmental, Commercial but Exempt From
Competition, and
Commercial Subject to Competition 10

Figure 2: DRID 20 Civilian and Military Manpower Authorizations by
Inherently Governmental, Commercial but Exempt From Competition, and
Commercial Subject to Competition
Categories 11

Figure 3: Manpower Criteria Codes 35

DOD Department of Defense

DRID Defense Reform Initiative Directive

FAIR Act Federal Activities Inventory Reform Act

OMB Office of Management and Budget

National Security and
International Affairs Division

B-285615

August 11, 2000

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

Dear Mr. Chairman:

The Department of Defense (DOD) has annually compiled an inventory of
commercial functions and activities1 performed in-house, in compliance with
Office of Management and Budget (OMB) Circular A-76. These inventories are
important as DOD has sought in recent years to identify commercial
activities involving thousands of positions that could be subject to
competition to determine whether it would be more cost efficient to maintain
the activities in-house or contract with the private sector for their
performance. A commercial activity is one that is performed by a federal
agency and that provides a product or service, such as aircraft maintenance
or base operating support, that could be obtained from a commercial source.2
Questions have arisen about the extent to which these inventories have fully
and consistently identified positions associated with commercial activities.

To improve identification of commercial activities, the Deputy Secretary of
Defense signed the Defense Reform Initiative Directive 20 in January 1998,
which directed the Department to develop an inventory that fully accounted
for positions that performed inherently governmental and commercial
activities. In October 1998, Congress passed the Federal Activities
Inventory Reform Act requiring all federal agencies, including the Defense
Department, to publish annual inventories of commercial

activities being performed by federal employees and the number of employees
associated with these activities starting in 1999.3

You asked that we provide information on DOD's efforts to identify functions
that could be studied for potential competition between the public and
private sectors. Accordingly, this report assesses (1) whether DOD has
improved the identification of commercial activities that could be studied
under A-76 and (2) the likelihood that DOD will increase the number of
functions and positions studied under A-76. In addition, as requested, we
are providing additional information on DOD's challenges and appeals under
the Federal Activities Inventory Reform Act in
appendix I. Our scope and methodology are included in appendix II.

The Department of Defense has improved the identification of commercial
activities that could be studied under A-76. In its 1998 Defense Reform
Initiative inventory, DOD components identified over 283,000 commercial
positions (231,000 civilian and 52,900 military)--81,000 more positions than
had been identified previously. DOD's 1999 Federal Activities Inventory
Reform Act inventory, which built upon the Reform Initiative inventory,
identified commercial functions and activities involving over 300,000
civilian positions, excluding military personnel that had been included in
the 1998 Reform Initiative inventory. Both inventories are viewed by DOD and
Office of Management and Budget officials as having improved the quality and
consistency of the Department's data on commercial activities. However, our
analysis suggests that the military services and Defense agencies did not
always consistently categorize similar activities, in part because of the
lack of clear guidance on how to identify which activities are inherently
governmental, commercial and exempt from competition, and commercial and
eligible for competition. Although some inconsistencies are likely to
continue to exist, their resolution could lead to more activities, or fewer,
being identified as eligible for A-76 study. The number of commercial
functions and associated positions contained in the inventories will likely
change over time based on iterative improvements the Department plans to
make to the inventory process and guidance. In addition, DOD's manpower and
business process reengineering initiatives and changes in the Defense
components' missions and operations could result in changes to the numbers
of commercial functions and associated positions in the inventories.

The Department does not expect to significantly increase the number of
functions studied under its A-76 program based on the identification of
additional positions in functions eligible for competition. Several factors,
such as geographic dispersion of positions and the inability to separate
commercial from inherently governmental activities, may prevent DOD from
developing studies for competition under A-76.

This report contains a recommendation to the Secretary of Defense concerning
the need to continue efforts to improve the consistency of DOD's inventory
of inherently governmental and commercial activities and positions across
the Department. DOD agreed with the recommendation and noted ongoing actions
designed to increase consistency in the inventory.

Since 1995, DOD has emphasized potential savings from competitive sourcing4
under OMB Circular A-76. This emphasis is in keeping with
long-standing federal policies that encourage agencies to consider
contracting with the private sector for commercial activities rather than
relying on government employees to provide them. However, over time, various
studies and observers questioned whether DOD had identified all its
commercial activities that could be competed. The 1995 Report of the
Commission on Roles and Missions of the Armed Forces, the 1996 Defense
Science Board report on outsourcing and privatization, and the 1997
Quadrennial Defense Review5 all identified outsourcing of commercial-type

activities performed by thousands of civilian positions as a source of
potential savings.6 Defense components, however, had difficulty identifying
activities to study under A-76. As a result, the Department decreased its
goal from studying nearly 230,000 positions between 1997 and 2005 to 203,000
positions.

To improve the commercial activities inventory process, DOD convened a
working group in April 1997 to develop standard criteria for identifying
functions that were inherently governmental and commercial. Subsequently,
the House National Security Committee directed DOD to develop a
departmentwide definition for categorizing activities as either inherently
governmental or commercial.7 On January 16, 1998, the Deputy Secretary of
Defense signed the Defense Reform Initiative Directive (DRID) 20, directing
the Under Secretaries of Defense for Personnel and Readiness and for
Acquisitions and Technology8 to coordinate a review of inherently
governmental and commercial activities performed by all authorized military
and civilian positions. The directive called for uniform guidelines,
criteria, and codes to classify functions and positions as inherently
governmental in nature; commercial but exempt from OMB Circular A-76
competition; or commercial activities that should be competed. DOD grouped
its functions and positions into categories as follows:

ï¿½ Inherently governmental, defined in OMB Policy Letter 92-1 as a function
so inherently related to the public interest as to mandate performance by
government employees.9

ï¿½ Commercial but exempt from OMB Circular A-76 competition because of risks
to mission performance, impact on mission effectiveness, or other specific
reason that the activity should be performed by agency employees. For
example, functions required to augment combat troops or for military
rotation between sea and shore assignments are exempt from competition.
Additional activities that must by law be performed by agency employees,
such as firefighters on military installations, are also exempt from
competition.

ï¿½ Commercial and eligible for competition, which includes all functions and
positions not performing inherently governmental activities or not otherwise
exempt from competition.

DOD used the baseline data derived from the DRID 20 inventory to develop the
inventory required by the Federal Activities Inventory Reform (FAIR) Act10
of 1998. The act directed federal agencies to submit by June 30 of each year
an inventory of all their activities that are performed by federal employees
but are not inherently governmental (i.e., are commercial). The act does not
require that agencies compete positions associated with commercial
activities identified on the inventory, although it requires agencies to
review the inventories and to use a competitive process to select the
provider,11 if it considers contracting with the private sector. The act
requires each agency to transmit its inventory to Congress, after OMB review
and consultation, and to make it available to the public. The act also
established a process under which an interested party12 may challenge an
activity's omission from or inclusion on the inventory. We reported on the

act's initial implementation in selected civilian agencies in April 2000 and
found that the usefulness of the inventories was limited.13

and Commercial Functions, but Inconsistencies Remain

DOD's development and application of standard guidelines and criteria for
identifying inherently governmental and commercial activities improved the
quality and consistency of the Department's information on commercial
activities compared to its previous efforts, according to DOD and OMB
officials. Through review and categorization of over 2.95 million14
positions held by military and government civilians, DOD identified over
283,000 positions associated with commercial activities that were
potentially eligible for competition between the public and private sector
in its 1998 DRID 20 inventory. Having already performed an inventory of its
inherently governmental and commercial activities for internal management
uses, DOD used the information as the basis for its response to FAIR Act
reporting requirements. DOD's FAIR Act inventory identified functions
involving 504,000 civilian positions, of which 308,000 positions were
associated with functions considered potentially eligible for competition.

Increasing the clarity of the guidance with respect to which activities
should be exempt from competition and the consistency with which the
military services and Defense agencies apply the guidance could lead to
identifying more commercial activities. However, there is a possibility that
more consistency could reduce the numbers of activities potentially eligible
for competition. While the DRID 20 inventory improved identification of
commercial activities over prior efforts, tight time frames for completing
the inventory, inadequate definitions of function codes, and variations
among the components in categorizing positions reduced the usefulness of the
data for identifying similar activities and for ensuring consistency, where
appropriate, departmentwide. DOD has initiated some actions to increase the
consistency and accuracy of future DRID 20 and FAIR inventories and has
identified long-term improvement goals.

Inherently Governmental and Commercial Functions and Associated Positions

In developing the DRID 20 inventory, DOD's components examined functions
involving 2.2 million military and 754,160 government civilian positions in
the military services and Defense agencies in fiscal year 1998. The effort
involved inventorying activities and positions in the 3 military
departments, 14 Defense agencies, and 7 field activities. The DRID 20
guidance directed the military services and Defense agencies to identify
functions and positions they considered essential to their missions (or
core), including military and civilian positions associated with inherently
governmental activities and with commercial activities that required
performance by federal employees because of national security or operational
risk concerns. Positions associated with activities that were not considered
mission essential (noncore) were deemed eligible for competition under A-76
unless they were restricted from competition by law, executive order,
treaty, or international agreement, or as a result of legislatively mandated
personnel levels or DOD management determination. DOD's inventory guidelines
and instructions provided codes for categorizing positions that specified
(1) the function performed (e.g., health services, depot repair, and
management headquarters)15 and (2) the type of manpower required (whether an
activity required military or civilian employees or whether the functions
could be considered for contract performance). (App. III provides additional
information on the manpower criteria coding used in developing the DRID 20
inventory.) These guidelines were designed to help the components determine
which positions were associated with activities that were (1) inherently
governmental, (2) commercial but require(s) government performance (i.e.,
exempt from competition) due to legislative restrictions or operational
concerns, or (3) commercial and subject to competition. The Department was
directed to report the DRID 20 inventory to the Secretary of Defense in
December 1998.

DRID 20 Inventory Described DOD's 1998 Workforce

The DRID 20 inventory was based on 1998 manpower data. As figure 1 shows,
DOD categorized 69 percent (about 2.05 million) of the 2.95 million

total military and civilian positions as being associated with inherently
governmental activities.16 Overall, 21 percent (618,506 positions) were
categorized as associated with activities that are commercial but that
should not be competed for a number of reasons, including national security
concerns and legislative prohibition. About 10 percent (283,600) of the
positions examined were categorized as associated with commercial activities
subject to competition. According to DOD's analysis, this represented about
81,000 more positions than had been identified in the 1997 commercial
activities inventory.

Source: Department of Defense.

Analysis of the inventory that broke out activities and associated positions
held by military and civilian personnel showed differences in the proportion
of positions associated with functions categorized as inherently
governmental, commercial but exempt, or commercial and subject to
competition. DOD found most military positions were associated with
activities that were considered either inherently governmental or commercial
but exempt from competitions. As figure 2 shows, about
1.8 million (82 percent) military positions were associated with activities
that were considered inherently governmental; 335,299 (15 percent) with
activities commercial but exempt; and 52,879 (3 percent) with commercial
activities subject to competition. On the other hand, it found government
civilian positions were more evenly divided between being associated with
functions that were inherently governmental, commercial but exempt from
competition, or potentially eligible to be considered for competitions.
About 240,240 civilians (32 percent) were associated with inherently
governmental activities; 283,207 (37 percent) with commercial activities
exempt from competition; and 230,715 (31 percent) with commercial activities
subject to competition.

Source: Department of Defense.

FAIR Inventory Identified Over 308,000 Positions Associated With Functions
Potentially Eligible for Competition

When the FAIR Act required information on federal agencies' commercial
activities, DOD used the civilian portion of its 1998 DRID 20 inventory as
the baseline for developing its FAIR Act inventory. DOD made several changes
to its DRID 20 inventory to comply with the FAIR Act requirements. In
implementing the FAIR Act, OMB revised Circular A-76 and called for
agencies' inventories to contain "reason codes" that agencies used to
categorize whether the commercial activities listed were exempt from or
could be considered for competition. For example, Code A indicated that the
function is specifically exempt from the cost comparison requirements of
A-76, while Code B indicated that an activity is performed by federal
employees and is subject to the cost comparison of the A-76 process. DOD
adapted the manpower mix criteria codes it used in the DRID 20 inventory to
assign reason codes.17

DOD made its FAIR inventory available to the public on December 30, 1999. Of
the 904,000 positions associated with commercial activities that were
reported under the act by 98 federal agencies, DOD's inventory represented
over half--about 504,000 (56 percent) civilian positions associated with
commercial activities. This represents about 67 percent of DOD civilian
positions. Of the 504,000 civilian positions associated with commercial
activities, the Department designated activities involving 308,000 positions
(61 percent) as potentially eligible for competition. The remaining 196,000
positions (39 percent) were associated with commercial functions considered
exempt from competition by the military services and Defense agencies.

The FAIR Act inventory of civilian positions associated with commercial
activities potentially eligible for competition represents a net increase of
about 25,000 full-time positions (or equivalent) from the 1998 DRID 20
inventory. In general terms, this difference represents DOD's exclusion of
about 53,000 military positions associated with commercial activities that
were reported in the DRID 20 inventory and the Army's addition of about
84,000 civilian positions associated with functions that were candidates for
competition. DOD excluded military positions associated with commercial
activities from its FAIR Act inventory because in its opinion, they were not
subject to the act. After the final guidance for implementing the FAIR Act
was published, OMB agreed with DOD's opinion. DOD also excluded positions
associated with DOD's Inspector General's office that were reported in
conjunction with other Inspectors General. DOD also excluded some positions
from its published inventory because of national security concerns, but it
maintains this information in a classified report that is not made public.18

Another change by the Defense Finance and Accounting Service subsequent to
the DRID 20 inventory increased the number of civilian positions associated
with commercial activities in the FAIR inventory. During the 8 months
between the completion of the 1998 DRID 20 inventory and the 1999 FAIR
inventory, the agency directed that many financial management functions be
reclassified from inherently governmental to commercial but exempt from
competition pending restructuring. Based on this shift, functions involving
over 85 percent (19,224) of the Defense Finance and Accounting Service's
22,215 positions were classified as commercial in the FAIR Act inventory, in
contrast to the DRID 20 inventory where functions involving only about 10
percent of positions (1,781) were categorized as commercial. DOD plans to
reflect these changes in future updates of the DRID 20 inventory.

Under the FAIR Act, interested parties have 30 days after publication of an
agency's inventory of commercial activities to challenge its decision to
include an activity on or exclude an activity from the inventory. DOD
published its first FAIR Act inventory on December 30, 1999. Defense's
components received a total of 21319 challenges. The services and Defense
agencies did not agree with any challenges completely. However, the Army,
Air Force, and Defense Logistics Agency plan to make some changes to their
inventories based on challenges to functions that result in a net decrease
of 3,800 positions that will be reflected in the 2000 inventories. The
components received a total of 50 appeals of their decisions on challenges.
No changes to the inventory resulted from appeals. (See app. I for more
information on DOD's challenges and appeals.)

As we reported in April 2000, the usefulness of the initial inventories some
civilian agencies developed under the FAIR Act was limited, in part, because
of problems with vagueness in functional coding guidelines and inconsistency
in format across agencies. Users of the DOD inventory made similar
complaints about vagueness, although they said that DOD's inventory,
provided on the Internet,20 was easily accessed and user-friendly and the
site provided procedures and contacts for challengers. Based on the
experience governmentwide in implementing the FAIR Act for the first time,
OMB has revised its guidance to agencies, standardizing the format for
reporting activities and requiring that all agencies' inventories be
available on the Internet.

Increase Competition Opportunities

The DRID 20 process was the first step in what DOD views as an iterative
process to inventory inherently governmental and commercial activities
accurately. However, the Department encountered a number of difficulties in
collecting consistent data across the military services and Defense
agencies. These included tight time frames, differences in components'
approaches, and problems with the guidance and codes DOD used to categorize
positions by the type of function performed and the type of manpower needed
to perform the function. Because the FAIR inventory was developed from the
DRID 20 inventory, it suffered from the same data limitations.

The services and Defense agencies had about 6 months between the time the
Office of the Secretary of Defense issued guidance on implementing the DRID
20 inventory on April 20, 1998, and the inventory's due date of October 31,
1998. DOD officials noted that the tight time frames hampered components'
abilities to perform thorough reviews of all functions and positions. In
particular component officials said they were unable to assess workloads and
whether in-house manpower was needed. They also indicated that they did not
have sufficient time to review all inherently governmental functions to see
if workload could be realigned into fewer inherently governmental positions.
DOD officials believe that more functions and associated positions may be
identified as commercial as the components have time to complete these
assessments.

DOD Components' Approaches to Identifying Inherently Governmental and
Commercial Positions Differed

DOD components' differing approaches to categorizing activities and
positions resulted in some inconsistency in application of codes describing
functions and what category was appropriate (i.e., inherently governmental,
commercial but exempt from competition, or commercial and eligible for
competition). For example, the Army used a centralized approach that
standardized coding across the Army. In contrast, the Navy, Air Force, and
Marine Corps used more decentralized approaches to enable commands to apply
codes reflecting their unique missions and situations. These approaches
created differences in the coding of similar functions and positions within
and across the three services. Some Defense agencies also took a more
decentralized approach. For example, the Defense Logistics Agency and
Defense Finance and Accounting Service tasked their component commands to do
the initial coding of their inventories with management reviews at the
headquarters level. As discussed earlier, differing judgements about whether
activities were commercial resulted in changes to the Defense Finance and
Accounting Service's inventory between the 1998 DRID 20 inventory and the
1999 FAIR Act inventory. The Service initially categorized activities
involving almost 90 percent of its positions as inherently governmental in
the DRID 20 inventory. Subsequently, new management at the Service
determined that activities initially coded as inherently governmental and
involving 85 percent of its positions were actually commercial.

Inadequacies in Codes and Guidance Used to Categorize Positions

Inconsistencies in the DRID 20 inventory also arose because of inadequacies
in the codes themselves and lack of clarity in guidance for applying them.
While the functional codes identified both general functional groups (such
as social services and base maintenance) and particular activities within
the larger functional group, components found that all the functions they
perform were not included in the function codes. For such functions,
components used miscellaneous "other" function codes, which obscured the
nature of the work performed and thus reduced the usefulness of the
inventory for identifying common functions across categories. For example,
according to DOD, the functions of almost
11 percent of its manpower were categorized as part of an "other" functional
group-- such as "Other Health Services"--because no specific functional code
properly identified the type of work being performed. In other cases,
function codes in the DRID 20 guidance appeared redundant. For example, in
addition to a functional group for automated data processing support, the
guidance provided specific function codes for automated data processing
support in other functional groups. Inadequacies in the function codes led
to inconsistent coding across and within components, which means that DOD
does not have a complete picture of the activities being performed by its
in-house workforce.

Defense components also encountered problems applying the manpower criteria
codes to characterize the type of manpower needed due, in part, to lack of
clear guidance about how to decide which activities could be exempted from
competition. Differing judgments resulted in inconsistencies in the
application of codes within and across components and reduced the data's
usefulness for meaningful cross-service analysis. For example, DRID 20
guidance on manpower criteria codes did not include a clear definition of
what constitutes core capabilities,21 how to define core capabilities, or
what would be acceptable risks from contracting functions. Components
exempted some functions and associated positions from competition to ensure
availability of core capabilities, such as support for combat forces,
although DOD officials said it was not clear how the components assessed
operational risks in making their decisions.

Function Titles Do Not Always Indicate Whether Activities Are Inherently
Governmental or Commercial

It is difficult to determine whether a function is inherently governmental
or commercial based only on its title. For example, motor vehicle operations
take place on bases and in combat areas and can involve transport of widely
varying cargo, from people to nuclear weapons. Differing missions and
functions among the services and Defense agencies can lead to differing
categorization of manpower. Personnel could be performing similar activities
but under different circumstances. Circumstances of performance should be
considered in deciding how to categorize the manpower required. However,
even with full knowledge of the activity and circumstances, making decisions
about the amount of risk that contract performance of a function would
involve is not an easy task.

The degree to which discretion is exercised in setting policy and managing
governmental property, for example whether decision authority is exercised
at the headquarters or installation level, is also a factor in determining
whether an activity is inherently governmental, according to DOD officials.
This could lead to justifiable differences in whether activities are
considered inherently governmental, commercial but exempt from competition,
or commercial and subject to competition. However, our review identified
inconsistencies among components' judgement on whether similar functions
were inherently governmental or commercial where consistency might be
expected. For example, the Army determined that public affairs activities at
its military academy were commercial, while the Navy classified most public
affairs activities at its academy as inherently governmental based on the
requirement for civilian direction and expertise.

In performing their analysis of the completed DRID 20 inventory data, DOD
officials reviewed function codes that indicated activities that might be
commercial, such as maintenance and repair of buildings, to determine if
positions associated with those functions were identified as commercial.
They found that some activities and associated positions that appeared to be
commercial were identified as inherently governmental or exempt from
competition in the inventory. For example, about 2,000 positions were
associated with maintenance and repair of buildings and were categorized in
the inventory as requiring military manpower. Some of these may result from
the services' needs to set aside positions to facilitate rotation and career
progression. Also, military training functions--including about 600
civilians--were exempted from competition because of national security risk
concerns. DOD officials said that the activities' coding could be correct or
it could indicate an error in categorizing what type of manpower is
required. Such anomalies are currently under discussion among DOD and
component officials. Our review identified child care services as an
additional activity that was exempted from competition by the services,
although it is does not appear to be a core capability under A-76 and is
widely available from the private sector.

Future Inventories

DOD expects to update its inventories annually, and it has begun to take
some steps to improve the accuracy and consistency of the data in future
DRID 20 and FAIR Act inventories. DOD officials stressed that the inventory
process is iterative, and improvements in the inventory process will evolve
as the inventory is updated. The Department's December 1999 report on the
1998 DRID 20 inventory process22 concluded that the inventory process
provides the best avenue for identifying opportunities for military to
civilian conversions and for competitions. The report discusses near-, mid-,
and long-term actions the Department needs to take to improve the inventory
process. To date, DOD has taken the following actions:

ï¿½ Established a team of representatives from functional, Joint Staff, and
Defense components to develop and implement improvements to the process. The
team, which has met weekly over the past year, is currently addressing
consistency issues and working on guidance to help the components assess
risks and determine core capabilities.

ï¿½ Revised the manpower criteria codes for future inventories by adding four
new codes--converted to in-house performance based on cost comparison,
converted to in-house performance without cost comparison due to
unsatisfactory performance or unreasonable price, no satisfactory commercial
source, and cost comparison waiver.

ï¿½ Clarified how components should classify manpower funded through separate
accounts and appropriations, such as the Army Corps of Engineers' activities
funded through the civil work appropriations, and how components should
handle positions assigned to joint functions, such as military manpower
assigned to other Defense agencies.

Longer term recommendations from the report include (1) analyzing inherently
governmental and exempt categories of manpower to ensure that activities and
positions meet the criteria for these categories and
(2) clarifying guidance for determining core capabilities so components can
determine the manpower needed to provide a minimum core capability to meet
their mission(s) or emergency requirements. DOD has taken some steps to
begin implementing these recommendations. For example, designated officials
from the Defense components and the Office of the Secretary of Defense meet
weekly to address various issues in categorizing activities. According to
DOD, these meetings have provided a starting point toward improving
consistency in coding and have enabled the components to gain insight into
each other's coding strategies and philosophies, and have, in some
instances, resulted in immediate adjustments to mistakes in coding.

DOD's completed, ongoing, and planned actions should help address many of
the weaknesses identified in its 1998 DRID 20 inventory process.
Specifically, DOD is taking steps to address some inconsistencies by
improving definitions and guidance, especially on assessing the risks of
contract performance of mission-essential requirements. However, additional
efforts may be required to address other inconsistencies that do not arise
from differences in Defense components' missions and requirements, such as
coding inconsistencies related to public affairs services and exemptions for
activities such as child care.

the Near Future Based on Recent Inventories

Although it was expected that the DRID 20 inventory process would identify
more functions and positions that could be reviewed for competition, it is
unclear whether the Department will significantly increase the numbers of
functions it studies in the near future. Department officials told us that
the DRID 20 inventory identified few new functions and associated positions
that could be studied under A-76 and that the increased numbers of positions
identified in the inventories did not automatically translate into the
potential for large numbers of additional studies to be initiated.
Additionally, service officials told us that they had already identified as
many competition opportunities as they could to meet savings goals, and they
believed that their capacity to conduct studies beyond those already planned
over the next few years was limited.

DOD had established goals for positions that the services and Defense
agencies should study and the savings to be achieved even before it
undertook the 1998 DRID 20 inventory. In 1999, the Department's goal was to
study nearly 230,000 positions and save $11.2 billion between 1997 and 2005.
As we recently reported, DOD has fallen behind in its timetable for
initiating A-76 studies and has had difficulties in completing its studies
within the average 2-year goal it established for these studies.23 For
example, studies involving nearly 29,000 positions were announced for study
in fiscal year 1997; however, completed studies covered only 11,716
positions from fiscal years 1997-1999. Because of these difficulties, DOD
has recently lowered its goal to studying 203,000 positions and saving
$9.2 billion between 1997 and 2005 and now plans to augment its A-76 program
with business process reengineering efforts to help it achieve additional
savings. DOD refers to its A-76 and reengineering efforts together as
strategic sourcing.

While DOD intends to use the results of its future DRID 20 inventories as a
management tool to identify commercial activities that it can study under
A-76 and strategic sourcing, it does not expect to study all the functions
categorized as commercial and potentially eligible for competition. In
developing competitions, DOD reviews activities (such as audio-visual
services or base operating support), which are the basic unit of study under
A-76, rather than positions. The number of positions that will actually be
studied for possible competition may be limited by a number of factors.
These include the following:

ï¿½ Geographic dispersion of candidate activities. Having positions associated
with commercial activities that are scattered over many locations may
prevent some of them from being grouped for competition.

ï¿½ Whether certain work categorized as commercial can be separated from
inherently governmental or exempted work. In some cases, commercial
activities classified as subject to competition are in activities that also
contain work that is inherently governmental or exempt from competition, and
the commercial workload may not always be separable from the workload
performed by the exempted positions.

ï¿½ Availability of resources for conducting A-76 studies. Officials of
several military service commands told us that they already have aggressive
competition programs under way and that they lack sufficient resources and
staff to conduct more competition studies in the near future.

These are valid reasons why DOD may not compete all the functions and
positions that are currently categorized as eligible for competition. Some
positions (about 6,400) categorized as subject to competition have already
been studied and retained in-house on the basis of a cost comparison with
the private sector.24 Also, DOD had no means of clearly identifying
positions associated with commercial activities that had already been
reviewed and the decision made to keep or bring the activities in-house.
These functions and positions were identified as eligible for competition,
although they would probably not be competed again in the near future. In
addition, the 1998 DRID 20 and FAIR Act inventories were based on 1998
manpower data, so some of the commercial functions and associated positions
potentially eligible for competition may have already been eliminated as a
result of organizational changes or downsizing. Downsizing efforts ongoing
in DOD will continue to reduce significantly the pool of civilian and
military positions, included those associated with commercial activities.
The manpower authorized for DOD for fiscal year 1999 was about 82,700
positions fewer than that authorized for fiscal year 1998. Further,
implementation of current efficiency initiatives, such as business process
reengineering, could increase or decrease the numbers of positions in
activities that could potentially be studied under A-76.

The 1998 DRID 20 inventory process improved the quality and consistency of
information on both inherently governmental and commercial activities and
associated positions, and it identified additional functions that could be
subject to competition. However, variations in how the Defense components
developed the DRID 20 and FAIR Act inventories and lack of clear guidance on
categorizing activities that are not core activities may have limited the
potential for identifying additional commercial positions. DOD's efforts to
resolve inconsistencies in the components' classifications of positions
could lead to identifying additional activities that might be considered for
competition, although it could also mean that activities which were
erroneously considered commercial are determined to be inherently
governmental. However, absent clearer guidance for determining whether a
commercial activity is core and therefore exempt from competition, these
efforts may not resolve differing judgements. Even if additional commercial
functions and positions are identified, DOD does not expect to increase the
number of functions reviewed under the A-76 process above its already
aggressive competition goals. Factors such as the inability to group
positions due to geographic dispersion or to separate commercial activities
from inherently governmental work may limit the number of functions that
could be studied.

To improve the way the Department of Defense's components categorize
activities, we recommend the Secretary of Defense increase consistency in
identification of commercial activities among and within the services and
Defense agencies by making decisions on whether certain activities, such as
child care and public affairs, are generally to be considered eligible for
competition.

The Department of Defense provided written comments on a draft of the
report. The Department agreed with our findings and our recommendation
concerning the need for increased consistency in identification of
commercial activities that are eligible for competition. DOD's written
comments on a draft of this report are reprinted in appendix IV. The
Department also provided some technical comments, which have been
incorporated in the report as appropriate.

In its comments, DOD noted that the inventory was a large undertaking and,
while improvements will have to be accomplished through an iterative
process, it has made considerable efforts to address such consistency
issues, including holding weekly meetings to develop and document clearer
instructions. It also emphasized that it has been and will continue to work
to improve the quality of the inventory.

We agree, as we noted in the report, that the inventory was an important
step toward identifying inherently governmental and commercial activities in
the Department and that the Department is taking actions that should
increase consistency within the inventory. However, the Department has yet
to address additional issues of consistency among the components,
particularly regarding which activities should not be exempt from
competition. We believe that the Department's leadership and sustained
emphasis on increasing consistency and accuracy in how noncore activities
are coded and how the coding is justified will be needed to help ensure the
Defense components identify which activities are commercial and should be
considered for competition.

We are providing copies of this report to Representative Solomon Ortiz,
Ranking Minority Member, Subcommittee on Military Readiness, House Committee
on Armed Services; 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 or Barry Holman on (202) 512-5581. Other key contributors to
this report were Marilyn Wasleski, Margaret Morgan, and Robert Poetta.

Sincerely yours,

David R. Warren, Director
Defense Management Issues

FAIR Act Challenges and Appeals

According to the Federal Activities Inventory Reform (FAIR) Act, interested
parties have 30 days after an agency publishes a notification of the
availability of the inventory to file a challenge that a function was
improperly included on the inventory or improperly omitted from it. The
agency then has 28 days from receipt of the challenge to respond to the
challenger in writing. The act also provides for interested parties to
appeal any adverse decision within 10 days after receiving the decision. The
agency then has 10 days after receiving the appeal to respond to the
appellant. The Office of the Secretary of Defense delegated responsibility
for receiving and responding to challenges and appeals to each component.
Challenges to DOD's 1999 FAIR inventory were due by January 31, 2000. As of
July 18, 2000, the Defense Logistics Agency was the only Defense component
that had not completed responses to all appeals to the 1999 FAIR inventory.

The Department of Defense's (DOD) Internet site25 contained DOD-wide and
component specific procedures for mounting challenges and appeals. In
general, these procedures described how and where to submit challenges and
appeals, explained the overall decision process and deadlines, and defined
important terms such as "interested party" and "commercial activity." Some
components modified DOD-wide procedures to fit their needs. For example, the
Army emphasized in its challenge and appeals procedures that challengers
should review its definitions of activities to determine whether an activity
was included on the inventory before considering a challenge. The Navy
required challengers to furnish additional information, such as a specific
location/installation and state of the challenged function, an
explanation/justification for the challenge, and whether the challenge was
directed to a Navy or Marine activity, so it could direct the challenge to
the particular command or office that could best respond. The remaining
Department components generally used the DOD procedures without change.

As shown in table 1, DOD received 213 challenges to its FAIR Act inventory,
a majority from individual employees and employee unions challenging the
Department's decision to include an activity on the FAIR inventory.
Challenges from interested parties in industry generally challenged omission
of a function that they contended should have been included on the
inventory.

                                Employees  Employee unions  Industry Total
 Army                           107        15               5        127
 Navy/Marines                   25         34               6        65
 Air Force                      0          2                7        9
 Defense agenciesa              1          4                5        10
 Office of the Secretary of
 Defense                        0          0                2        2
 Total                          133        55               25       213

Note: Includes two challenges addressing DOD-wide issues sent to each of the
military services, some of the Defense agencies, and the Office of the
Secretary of Defense. The Office of the Secretary of Defense prepared one
DOD-wide response to each of these challenges.

aDoes not include one challenge that had not been addressed by the Defense
Logistics Agency as of July 18, 2000.

Source: Department of Defense components and Office of the Under Secretary
of Defense (Acquisitions, Technology and Logistics).

As shown in table 2, a majority of the challenges to the Department's FAIR
Act inventory were directed to the Army. The Army took an aggressive
approach to identifying commercial activities, presuming that some
activities were commercial unless otherwise justified. Of the 504,000
positions associated with commercial activities on DOD's FAIR Act inventory,
almost 222,000 (44 percent) were identified by the Army. Overall, the
Department and its components denied 203 or about 96 percent of the
challenges received and partially agreed with 10. Of the 203 challenges that
were denied, challengers submitted 50 appeals. The Department decided none
of the appeals in favor of the appellant.

                                Challenges                 Appeals
        Received         Received Denied  Agreeda  Received  Denied Agreed
 Army                    127      120     7        25        25     0
 Navy/Marines            65       65      0        17        17     0
 Air Force               9        7       2        2         2      0
 Defense agenciesb       10       9       1        5         5      0
 Office of the Secretary
 of Defense              2        2       0        1         1      0
 Total                   213      203     10       50        50     0

Note: Challenges and appeals contain two challenges addressing DOD-wide
issues sent to each of the military services, some of the Defense agencies,
and the Office of the Secretary of Defense. The Office of the Secretary of
Defense prepared one DOD-wide response to each of these challenges.

aThe Army, Air Force, and Defense Logistics Agency did not agree with any
challenge completely. The number in the chart indicates the number of
challenges with which the Army and Air Force agreed in part.

bDoes not include one challenge and three appeals that had not been
addressed by the Defense Logistics Agency as of July 18, 2000.

Source: Department of Defense components and Office of Under Secretary of
Defense (Acquisitions, Technology, and Logistics).

The components took different approaches in resolving challenges and
appeals, reflecting their different organizational and management
structures. The Army centralized the receipt and disposition of challenges
and appeals delegating the Assistant Secretary of the Army (Manpower and
Reserve Affairs) to receive and decide challenges. In resolving challenges,
the Army looked at coding issues on an Army-wide functional basis rather
than from an installation or employee position basis often described in the
challenge, as the other military services did. Using this approach, the Army
has decided to delete from future FAIR Act inventories about 3,800 full-time
employees (or equivalent) that it determined to be performing inherently
governmental activities in two functions: "Personnel Community Activities
and Manpower Program Management" (44 labor negotiators identified by a
specific occupational series and grade) and "Contracting" (3,750 employees
under one specific occupational series).

The Navy and Marine Corps received challenges at the service level,
responding to them with input from their commands. The Navy and Marine Corps
did not change how any functions and positions were categorized based on the
challenges and appeals process. The Air Force delegated to its commands the
responsibility for receiving and resolving challenges and appeals because
commands were more familiar with the reasons for coding of particular
associated activities and positions. The Air Force did not change any coding
based on the challenges and appeals process. The Air Force Materiel Command
agreed with one challenger that family services were inherently governmental
and should not be part of the inventory based on its internal guidance.
Although it did not remove the activity from the 1999 FAIR inventory, it
plans to do so for the 2000 inventory.

Challengers raised issues about coding decisions the Defense components made
and the level of detail provided by DOD in the inventory. In many cases,
challengers questioned a component's decision to exempt or not to exempt
particular functions from competition, a decision that may not be challenged
under the act.26 They also argued that greater detail was needed to enable
interested parties to identify specific tasks being performed. Table 3 shows
the basis for employee and union challenges of functions they asserted
should be excluded from the FAIR inventory because they believed them to be
inherently governmental and the basis for industry challenges of functions
that they believe should be included in the FAIR inventory because they were
not inherently governmental.

 Challenge basis              Army  Navy/Marines  Air     Defense       DOD
                                                  Force   agenciesa
 Employee/union challenge of
 functions that should be
 exempt from FAIR Act
 inventory
 Privacy, confidentiality,
 and conflict of interest     17    28                    2
 concerns
 Has control over government
 property and appropriations  17                  1       2
 Actions bind the government
 to action                    20    14
 Exempt by statute,
 regulations, guidance        50
 Develops policy and
 guidance; exercises
 discretion in interpreting
 laws and developing policy   5     42            1       2
 Knowledge not readily
 available in the private     2                   1
 sector
 Function generally meets
 definition of inherently
 governmental                 23    1
 Function treated as
 inherently governmental by
 other components             12
 Function is core and should
 be exempt                          3                     1
 Function not severable from
 inherently governmental work       1
 Other: Similar functions not
 included in the FAIR         1
 inventory
 Other: Insufficient
 information in inventory           1             1       1
 Industry challenge of
 functions that should be
 included in FAIR Act
 inventory
 Too many activities exempt
 from competition             1                   4
 Function is commercial             2                     1
 Other: Insufficient
 information in inventory           3             1       1             2

Note: We counted challenges received separately, although several challenges
were focused on the same activity and location and used identical arguments
for changing the inventory. We categorized challenges based on what appeared
to be the primary reason(s) for the challenge.

aDoes not included one challenge that had not been addressed by the Defense
Logistics Agency as of July 18, 2000.

Source: Department of Defense components and Office of the Under Secretary
of Defense (Acquisitions,Technology and Logistics).

Representatives of employees and of private industry expressed specific
concerns about the contents and utility of the Department's FAIR Act
inventory through their challenges and in meetings with us. Employees
usually argued that specific positions and activities should be
characterized as inherently governmental and should not appear on the
inventory. Several employees and employee groups took issue with DOD's
characterization of some functions as commercial when, they asserted, the
activities involved sensitive or private information or might create
liability for the government. Generally, the services agreed that the
government should maintain control and oversight of activities through
accountable government employees, so particular employees might be
performing inherently governmental activities even when an overall function
is identified as commercial and is therefore properly included on the FAIR
Act inventory. However, they said that deciding the appropriate number and
type of positions associated with commercial functions that could and should
be competed is part of a competition study.

Interested parties from outside the government generally criticized DOD's
FAIR Act inventory as not including enough specific information to help them
identify activities to challenge. Some challengers stressed that the summary
level of data was inadequate to help them identify activities that should be
challenged, particularly in the 30 days allowed under the act. For example,
industry associations were concerned that the information presented did not
sufficiently describe positions and tasks associated with functions or
include information on functions or activities that were excluded from the
inventory, such as information on inherently governmental functions and
contractor work years. Industry representatives asserted that these
limitations precluded informed industry review and evaluation of the
inventory. Some industry representatives stated that the usefulness of the
inventory could be improved by including the basis for exempting a function
from competition due to law or executive decision and including information
on inherently governmental activities. Although noting that DOD had provided
the information required by the act, DOD officials agreed that it would be
difficult for interested parties to identify opportunities for appeals from
the summary information the act required and that DOD presented in its
database.

Incompleteness

As table 4 shows, the Defense components rejected FAIR Act challenges for a
variety of reasons. About 15 percent of all challenges did not meet the
challenge provisions of the act, which specified that interested parties
could challenge an agency's decision to include an activity on the FAIR Act
inventory or to omit an activity from the inventory. The primary reason for
rejecting challenges to include activities on the inventory was the failure
by the challenger to specify an activity being challenged. Some of the
reasons for rejecting a challenge to remove an activity from the list of
commercial activities included the availability of the function in the
private sector and the lack of support from the challenger that a function
requires a person to have government authority or to make value judgments
for the government.

 Basis for component                             Air     Defense       DOD
 decisiona                   Army  Navy/Marines  Force   agenciesb

 Responses to employee/union
 challenges
 Function does not suggest
 government authority or the
 making of a value judgment  31    26
 for the government
 Function commonly available
 in the private sector       64    40            1
 Challenge does not meet FAIR
 Act challenge requirements  6     3             1       2
 Function not entirely
 inherently governmental     54                          1
 Personnel in function
 performed at grade lower
 than criteria for inherently17
 governmental of GS-13 and
 abovec
 Function is inherently
 governmental and erroneously7                   1
 included on list
 Function currently under
 A-76 study                  21
 Other reasons               7     16            1       2
 Responses to industry
 challenges
 Challenge does not meet FAIR
 Act challenge requirements  4     6             3       5             2
 Function too integrated into
 military workload to be
 severed for contractor                          5
 performance
 Other reasons               2                   1       1

Note: We categorized challenge decisions based on what appeared to be the
primary basis(es) for the response.

aThe component's responses to challenges often included more than one
decision rationale.

bDoes not include one challenge that had not been addressed by the Defense
Logistics Agency as of July 18, 2000.

c This is Army criteria that is not applicable to the other components.

Source: Department of Defense Components and Office of the Under Secretary
of Defense (Acquisitions, Technology and Logistics).

Our analysis of the Department's responses to the challenges indicates that
the military services and Defense agencies considered the substantive issues
raised. The responses addressed the major points of challenges that related
to whether a function was erroneously included in or omitted from the
inventory. In most instances, the services' and Defense agencies' responses
explained a rationale for their decisions regardless of whether

they agreed or disagreed with the challenge. To increase the usefulness of
the challenge process to interested parties, the Army provided selected
responses to challenges on its Internet site.27 In the cases of two
interested parties that raised questions about compliance and format with
all of the services, the Department responded on behalf of all the
components, detailing its interpretation of the FAIR Act's requirements.

Objectives, Scope, and Methodology

The Chairman, Military Readiness Subcommittee, House Committee on Armed
Services, requested that we provide information on DOD's efforts to identify
functions that could be studied for potential competition between the public
and private sectors. Accordingly, this report assesses
(1) whether DOD has improved the identification of commercial activities
that could be studied under A-76 and (2) the likelihood that DOD will
increase the number of functions and positions studied under A-76.

To assess whether DOD has improved the identification of commercial
activities that could be subject to public and private competitions, we held
discussions on the 1998 DRID 20 inventory process with representatives of
the Under Secretaries of Defense for Acquisition, Technology and Logistics
and for Personnel and Readiness and with commercial activities officials
from the Army, the Air Force, the Navy, the Marine Corps, the Defense
Logistics Agency, and the Defense Finance and Accounting Service. To obtain
a command level of perspective on DRID 20 implementation, we visited three
Army, two Air Force, and four Navy major commands with competitive sourcing
and strategic sourcing programs to discuss the implementation of the 1998
DRID 20 inventory and their plans to use the results of the inventory. We
obtained and analyzed summary data from the completed 1998 DRID 20
inventory. We discussed the problems encountered with the application of the
codes and inconsistencies with DOD and component officials. We also reviewed
DOD's December 1999 report on the 1998 DRID 20 inventory, including
information on its implementation, and discussed the recommendations and
proposed improvements to the inventory process with DOD officials. Further,
we analyzed DOD's FAIR Act inventory of commercial positions, including the
functions eligible for competition and exempted from competition by military
services and Defense agencies. We discussed implementation of the FAIR Act
with representatives of the Under Secretaries for Acquisition, Technology
and Logistics and for Personnel and Readiness.

To assess the likelihood that DOD will increase the number of positions
studied under A-76, we reviewed our previous work on DOD's competitive
sourcing programs and conducted interviews with cognizant DOD and component
officials. We also reviewed DOD's analysis of the DRID 20 process and
discussed the prospects for increasing the numbers of A-76 studies conducted
in the near future with DOD and component officials.

To provide information on challenges and appeals to DOD's FAIR Act
inventory, we reviewed the FAIR Act legislation and OMB's guidance on
implementing the legislation. We also discussed implementation of the FAIR
Act and its results with DOD and service representatives and obtained
pertinent guidance from representatives of the Under Secretaries of Defense
for Acquisition, Technology and Logistics and for Personnel and Readiness;
officials from the military services; selected Army, Air Force, and Navy
commands, as discussed earlier; and officials from the Office of Management
and Budget. We obtained and analyzed the basis for the challenges and
appeals as well as DOD responses to the challenges and appeals, and we
discussed DOD's decisions with DOD and component officials. As of July 18,
2000, the Defense Logistics Agency had not completed its responses to one
challenge and three appeals; therefore, these are not included in our
analysis. We met with representatives of the American Federation of
Government Employees, a federal employee union, and industry groups,
including the Coalition for Outsourcing and Privatization and the
Information Technology Association of America, to obtain their views on
DOD's implementation of the FAIR Act and its processes for challenges and
appeals.

We performed our review from July 1999 through June 2000 in accordance with
generally accepted government auditing standards.

DOD's DRID 20 Inherently Governmental and
Commercial Activities Inventory Codes

To help in identifying commercial activities performed in-house that would
be studied for competitive sourcing, the Defense Reform Initiative Directive
(DRID) 20 directed the military services and Defense agencies to (1) use
uniform criteria and guidelines for categorizing positions based on function
and type of manpower required and (2) include in the review all manpower
reported in the fiscal year 1999 President's Budget and DOD Manpower
Requirements Report. The Office of the Under Secretaries of Defense for
Acquisition, Technology and Logistics and for Personnel and Readiness
established a senior-level working group and an action
officer-level team to develop the guidance, criteria, and codes for the
inventory. The criteria and guidelines used in the 1998 DRID 20 inventory
are described below.

DOD's inventory guidelines and instructions provided codes that
(1) specified the reason for whether a position should be military, civilian
employees, or contractors (manpower criteria codes) and (2) identified the
function performed (function codes). Building on prior practices, the
Department graphically portrayed the manpower criteria codes that
differentiate between work that must be performed by the military or
civilian employees as well as what work could be performed by contract
employees if that proved cost-effective. Core positions are essential to the
components' national defense mission and should be performed by department
employees, and noncore activities are those that were not associated with
essential functions and that can be performed by contractors with acceptable
levels of risk. This coding scheme also enabled DOD to group the positions
as inherently governmental, commercial but exempt from competition, or
commercial and eligible for competition. Figure 3 shows the codes in
relationship to core and noncore positions.

aGovernment performance is required.

Source: Department of Defense.

DOD used function codes to categorize activities by the type of work
performed so that it could identify similar activities being performed by
different components departmentwide. The codes identified both general
functional groups and particular activities within the larger functional
group. Each function code begins with a letter associating the activity with
1 of 13 functional groups, such as social services, health services,
education and training, and installation services. Table 5 shows the number
and percent of military and civilian positions in these functional groups.

 Functional group                       Military and civilian      Percent
                                        authorizations
 (Y)a Management headquarters and other
 selected centralized functions         1,935,770                  66
 (includes combat activities)
 (S) Installation services              198,012                    7
 (T) Other nonmanufacturing             192,079                    7
 (U) Education and training             136,257                    5
 (H) Health services                    134,111                    5
 (J) Equipment maintenance              98,418                     3
 (K) Depot repair                       67,430                     2
 (R) Research, development, test, and
 evaluation                             65,465                     2
 (G) Social services                    47,174                     2
 (Z) Maintenance and repair of real
 property                               46,258                     2
 (W) Automated data processing          21,000                     1
 (P) Base maintenance                   5,518                      0
 (X) In-house manufacturing             3,719                      0
 Total                                  2,951,211                  100

aAlpha characters represent the individual functional groups.

Source: Department of Defense.

Numeric codes further categorized the activities by their specific
functions. For example, the code "H101" represents hospital care within the
functional group of health services, "J 502" represents aircraft engine
maintenance within the functional group of intermediate, direct, or general
repair and maintenance of equipment, and "Y100" represents combat forces
within the functional group of management headquarters and other selected
centralized functions. These function codes were used to categorize
activities in both the DRID 20 and FAIR Act inventories.28

Comments From the Department of Defense

(709427)

Table 1: Summary of DOD FAIR Act Challengers 25

Table 2: DOD FAIR Act Challenges, Appeals, and Decisions 26

Table 3: FAIR Act Challenges by Military Services, Defense
Agencies, and DOD-wide 28

Table 4: Responses to Challenges by Basis for Decision by
Component 30

Table 5: 1998 DRID 20 Inventory by Functional Group 36

Figure 1: DRID 20 Inventory of All DOD Functions and Associated Positions
Categorized as Either Inherently Governmental, Commercial but Exempt From
Competition, and
Commercial Subject to Competition 10

Figure 2: DRID 20 Civilian and Military Manpower Authorizations by
Inherently Governmental, Commercial but Exempt From Competition, and
Commercial Subject to Competition
Categories 11

Figure 3: Manpower Criteria Codes 35
  

1. Functions and activities are used interchangeably in this report.

2. Office of Management and Budget Circular A-76, Revised Supplemental
Handbook (1996) Appendix I.

3. Section 5 of the Federal Activities Inventory Reform Act, Public Law No.
105-270, defines an inherently governmental activity as "a function that is
so intimately related to the public interest as to require performance by
Federal Government employees."

4. Instead of the term outsourcing, DOD currently uses the term competitive
sourcing.

5. Report of the Commission on Roles and Missions of the Armed Forces:
Directions for Defense, Department of Defense (May 24, 1995); Report of the
Defense Science Board Task Force on Outsourcing and Privatization, Office of
the Under Secretary of Defense for Acquisition and Technology (Aug., 1996);
Report of the Quadrennial Defense Review, Department of Defense (May 1997).

6. On the other hand, others believe that DOD needs to assess the extent to
which it already relies on contractor support. To this end, Congress enacted
section 343 of the National Defense Authorization Act for Fiscal Year 2000,
Public Law 106-65, which requires DOD to report by March 1, 2001, the number
of direct and indirect labor work years (or equivalent) performed by
contractors in fiscal year 2000.

7. Report number 105-132 on H.R. 1119, the National Defense Authorization
Act of Fiscal Year 1998 (June 16, 1997).

8. Now titled Acquisition, Technology and Logistics.

9. Office of Federal Procurement Policy Letter 92-1, "Inherently
Governmental Functions" (Sept. 23, 1992), defines inherently governmental
for purposes of executive branch policy and provides a list of illustrative
services and activities that are as a matter of policy considered inherently
governmental and a list of activities that are not considered inherently
governmental.

10. P.L. 105-270.

11. The FAIR Act does not apply to Non-appropriated Funds Instrumentalities
or certain depot maintenance and repair as defined in 10 U.S.C. 2460.

12. As defined in section 3 of the FAIR Act, interested parties are (1) a
private sector source that is a prospective or actual offeror for any
contract who has a direct economic interest in performing the activity and
would be adversely affected by a determination not to procure the
performance of the activity from a private sector source; (2) a
representative of any business or professional association whose membership
includes private sector sources described in (1) above; (3) an officer or
employee of an organization within the executive agency that is an actual or
prospective offeror to perform the activity; and (4) the head of a labor
organization, referred to in 5 U.S.C. sect. 7103 (a) (4), which includes members
who are officers or employees within an executive agency involved in
performing the activity.

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

14. DOD included active duty, active guard and reserve, and civilian
government personnel in the DRID 20 inventory. It excluded nonappropriated
fund manpower and some military positions (such as transients, patients,
prisoners, and students) because they were not subject to competition.

15. The 12 major functional groups and function codes are listed in OMB
Circular A-76 Revised Supplemental Handbook. DOD added one functional group
(Management Headquarters and Other Selected Centralized Functions). DOD also
created another group of codes to define more clearly the core and noncore
activities. This was done to show the reasons activities were inherently
governmental or commercial but exempt or commercial and eligible for
competition under OMB Circular A-76.

16. The number of positions authorized for 1998 was 82,700 more than
authorized for 1999.

17. Reason codes are described in appendix 2 of OMB's Circular A-76
Supplemental Handbook. DOD identified some errors in its adaptation of DRID
20 manpower codes to OMB reason codes. DOD plans to correct these errors in
the 2000 FAIR inventory.

18. DOD's 1999 FAIR Act inventory included about 40,000 foreign national
employees overseas, according to a DOD official. About 10,000 were
considered subject to competition. DOD's General Counsel has advised that
foreign nationals should not be included in subsequent FAIR Act inventories
because they are not covered under the act. DOD will continue to include
them in future DRID 20 inventories for internal management purposes.

19. As of July 18, 2000, the Defense Logistics Agency had not responded to
one challenge and three appeals. These are not included in totals.

20. http://gravity/Lmi.org/dodfair

21. According to the A-76 Supplemental Handbook, a minimum of specialized,
scientific or technical in-house or contract employees, and related
commercial workload may be maintained, without cost comparison, to ensure
that the government has the necessary capabilities to fulfill its mission
responsibilities or meet emergency requirements. For purposes of the
inventory, core positions included both military and civilian positions in
activities that were inherently governmental or commercial but needed to be
retained
in-house to meet mission requirements.

22. Report on the DRID 20 Inventory: Analysis and Recommendations,
Department of Defense, December 1999.

23. DOD Competitive Sourcing: Some Progress, but Continuing Challenges
Remain in Meeting Program Goals (GAO/NSIAD-00-106 , Aug. 8, 2000).

24. Historically, about half of the activities competed between the public
and private sectors have been won by the public sector.

25. http://gravity/Lmi.org/dodfair

26. We are currently completing a review of the FAIR Act challenges and
appeals processes governmentwide and expect to include an analysis of DOD's
challenges and appeals processes in a later report.

27. http://www.asamra.army.pentagon.mil/fair

28. Appendix II of OMB's Circular A-76 Supplemental Handbook, as revised in
June 1999, contains a complete list of function codes.
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