Quadrennial Defense Review: Status of Efforts to Implement Personnel
Reductions in the Army Materiel Command (Letter Report, 03/31/99,
GAO/NSIAD-99-123).

The Report of the Quadrennial Defense Review, issued in May 1997,
directed the Army to reduce personnel to help free up funds for forces
modernization. The Army expected that its Materiel Command could
significantly reduce the number of its civilian personnel by relying
more on the private sector. Congress, however, has raised concerns about
the extent of reductions in the Army Materiel Command over the years.
This report discusses (1) the Army Materiel Command's plans and time
frame for achieving the reductions, (2) the projected cost savings from
such reductions, and (3) the cited impacts the reductions will have on
workload and readiness.

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

 REPORTNUM:  NSIAD-99-123
     TITLE:  Quadrennial Defense Review: Status of Efforts to Implement 
             Personnel Reductions in the Army Materiel Command
      DATE:  03/31/99
   SUBJECT:  Military personnel
             Military downsizing
             Human resources utilization
             Civilian employees
             Military cost control
             Reductions in force
             Privatization
             Personnel management
             Federal agency reorganization
IDENTIFIER:  Army Working Capital Fund
             DOD Quadrennial Defense Review
             
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Cover
================================================================ COVER


Report to Congressional Committees

March 1999

QUADRENNIAL DEFENSE REVIEW -
STATUS OF EFFORTS TO IMPLEMENT
PERSONNEL REDUCTIONS IN THE ARMY
MATERIEL COMMAND

GAO/NSIAD-99-123

Quadrennial Defense Review

(709385)


Abbreviations
=============================================================== ABBREV

  AMC - Army Materiel Command
  DOD - Department of Defense
  QDR - Quadrennial Defense Review

Letter
=============================================================== LETTER


B-281817

March 31, 1999

Congressional Committees

In May 1997, the Secretary of Defense issued the Report of the
Quadrennial Defense Review (QDR), which directed the Army to reduce
personnel to help free up funds to be used to modernize the force. 
The Army expected that the Army Materiel Command (AMC) could
significantly reduce the number of its civilian personnel by
increasing reliance on the private sector.  Congress has been
concerned about the extent of reductions in AMC over the years. 
Accordingly, the Strom Thurmond National Defense Authorization Act
for Fiscal Year 1999 required us to review the personnel reductions
in AMC that were directed as a result of the QDR.  Specifically, this
report addresses (1) AMC's plans and time frame for achieving the
reductions, (2) the projected cost savings from such reductions, and
(3) the cited impacts the reductions will have on workload and
readiness. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Army Materiel Command has identified various initiatives to
eliminate 8,530 civilian positions by fiscal year 2004 as called for
in the Quadrennial Defense Review.  The majority of the reductions
are now based on planned organizational changes, operating
efficiencies, and anticipated future workload decreases, with lesser
emphasis on competitive sourcing studies than originally anticipated
by the defense review.  About 20 percent of the reductions are
expected to occur over the next 2 years, and actions are underway to
achieve the majority of these reductions.  Most, or about 80 percent,
of the reductions are expected to occur in fiscal years 2001 through
2004.  However, plans for some of these reductions are still being
finalized and uncertainties exist about some of these plans. 

The Army estimated that the personnel reductions in the Command would
result in $1.4 billion in cumulative savings from fiscal year 1999
through 2004 and $589 million in annual recurring savings thereafter. 
Our analysis indicates that estimated savings will be less than
anticipated both in the short and long term.  The Army did not
account for all of the investment costs that would be required to
achieve the savings.  For example, the Tank-automotive and Armament
Command estimated that about $35 million in investment costs were not
included in the Army's analysis of projected savings.  Also, the Army
did not estimate all the personnel separation costs likely to be
associated with implementing the reductions.  Additionally, about $21
million in savings estimated for fiscal year 2000 could be delayed
because competitive sourcing studies are taking longer to complete
and implement than planned.  Furthermore, the savings are overstated
by an estimated $52 million at least through fiscal year 2005 because
the Army used higher than average civilian salary costs to compute
its savings.  Further, long-term annual recurring savings to the Army
are likely to be as much as 17 percent lower than expected since some
planned personnel reductions reflect positions funded by non-Army
organizations for work done on a reimbursable basis. 

Because most of the Quadrennial Defense Review reductions will occur
between 2001 to 2004, much of the impact on workload and readiness is
yet to be determined.  Army Materiel Command officials, while
expressing concerns about challenges they face in meeting the
reductions, could not point to any significant adverse effects to
date other than on employee morale.  Command officials stated that
the ongoing reductions continue to have only marginal impacts on
operations, which they have dealt with so far through various
reorganizations and reengineering actions.  The Command also faces
additional personnel reductions beyond those mandated by the
Quadrennial Defense Review. 

We are not making any recommendations in this report because it
appears that the Command has enough options to help achieve its
reduction goals by fiscal year 2004.  However, as we noted, the
savings estimates associated with these reduction goals are
overstated. 


   BACKGROUND
------------------------------------------------------------ Letter :2

AMC is responsible for weapon systems development, advanced research,
and the maintenance and distribution of spare parts.  With its
headquarters in Alexandria, Virginia, AMC accomplishes its mission
through nine major subordinate commands that direct the operation of
numerous activities--depots, arsenals, ammunition plants,
laboratories, test activities, and procurement operations.  AMC is
funded through direct appropriations and reimbursements from the
Army's Working Capital Fund,\1 other Army activities, and non-Army
sources.  Approximately 63 percent of AMC's civilian positions are
funded through reimbursements. 

In May 1997, the Department of Defense (DOD) completed the QDR, a
comprehensive review of national security threats, risks, and
opportunities facing the United States to 2015.  According to DOD,
this review intended to provide a blueprint for a strategy-based,
balanced, and affordable program.  The review directed the Army to
reduce 17,366 civilian positions.  The Army allocated 8,530 of these
reductions to AMC.  The Army assumed that AMC could eliminate 6,980
positions by conducting public/private competitive sourcing studies\2
and another 1,550 positions through implementing other organizational
efficiencies.  Appendix II shows the planned reductions among AMC
subordinate organizations. 

The QDR reductions continue the downsizing of AMC that started in
1989.  Between fiscal year 1989 and 1997, AMC reported reducing the
number of its civilian positions from about 102,000 to 62,000, or 38
percent, as part of DOD's overall downsizing.  Prior to the QDR, the
Army had planned to reduce AMC to about 56,000 civilians by fiscal
year 2003.  The QDR will reduce AMC to about 48,000 positions by
fiscal year 2004.  In addition to reductions called for in the QDR,
the Army plans to reduce AMC civilian authorizations by another 2,000
positions between fiscal year 2000 and 2005. 


--------------------
\1 Under this funding arrangement, applicable to a variety of
business activities, an Army activity, such as AMC, sells goods and
services on an inter and intraservice basis on predetermined rates
designed to recoup operating costs.  Working capital fund customers
pay for the goods and services, primarily with operation and
maintenance funds appropriated by Congress. 

\2 These competitive sourcing studies were to be done employing the
Office of Management and Budget Circular A-76 process.  See appendix
I for a detailed description of the A-76 process. 


   PLAN FOR ACHIEVING THE
   PERSONNEL REDUCTIONS IS
   EVOLVING
------------------------------------------------------------ Letter :3

The Army's plan for achieving its AMC personnel reduction goals are
still evolving.  However, given the large number of initiatives,
there should be sufficient opportunities to achieve the reductions. 
The Army originally planned to achieve most of AMC's QDR reductions
(about 7,000) through competitive sourcing studies.  However, the
number of positions initially considered suitable for such studies is
now considerably smaller and the Army is still uncertain about how
many positions will actually be studied.  Consequently, AMC now
expects to achieve most of its personnel reductions through other
initiatives to streamline its organization and achieve operational
efficiencies.  AMC is making its initial QDR reductions during fiscal
year 1999 and 2000; however, some of the reductions are expected to
take longer to implement than initially anticipated.\3 Most, about 80
percent, of the total reductions are expected to occur between fiscal
year 2001 and 2004. 


--------------------
\3 We have reported that while we believe that competitive sourcing
studies are likely to produce savings, we have indicated some
uncertainties exist about the magnitude of long-term savings.  See
DOD Competitive Sourcing:  Questions About Goals, Pace, and Risk of
Key Reform Initiative (GAO/NSIAD-99-46, Feb.  22, 1999). 


      BASIS FOR THE REDUCTIONS HAS
      CHANGED
---------------------------------------------------------- Letter :3.1

To achieve the QDR reductions, the Army assumed that about 35,000 of
AMC's civilian positions could be subjected to competitive sourcing
studies.  However, in October 1998, after completing action on a DOD
directive that all components uniformly reassess the number of
positions that were commercial in nature and that could be subject to
competitive sourcing studies,\4 the Army concluded that only about
19,000 AMC positions were clearly suitable for study.  It found that
nearly 11,000 additional positions might be candidates for study but
first required additional assessment.  This further assessment is
expected to be completed by November 1999. 

In the short term, AMC was left with a still substantial study
universe of about 19,000 positions.  Of that universe, nearly 2,400
positions were already under study.  Since then, studies of about
6,800 additional positions have begun.  AMC officials have expressed
some uncertainty about the extent to which studies of the remaining
positions will be made because they include significant numbers of
secretarial and administrative positions as well as some positions in
functions that AMC plans to seek waivers to Circular A-76
requirements. 

While competitive sourcing studies remains a key tool to help achieve
the planned reductions, AMC has turned its attention to other ways of
achieving the personnel reductions.  These initiatives can result in
significant reductions and include such actions as position
elimination, organizational realignments, and reengineering of
functions.  The range of initiatives AMC expects to use to achieve
its reductions and the year the reductions are expected to occur are
shown in table 1. 



                                     Table 1
                     
                        AMC Initiatives to Achieve the QDR
                            Reductions by Fiscal Year

Initiative         1999    2000    2001    2002    2003    2004       Total
---------------  ------  ------  ------  ------  ------  ------  ===============
Redesign the         18             344     761     849               1,972
 commodity
 commands
Restructure the                              13     885     669       1,567
 research,
 development,
 and
 engineering
 centers
Compete                                     630                        630
 functions at
 Watervilet,
 Pine Bluff,
 and Rock
 Island
 arsenals
Compete                             545                                545
 functions in
 the Test and
 Evaluation
 Command
Reengineer           46      72     196     117      14      79        524
 selected
 functions
Compete base                469              17                        486
 operations in
 the Industrial
 Operations
 Command
Merge the             2     131              20      91     178        422
 Chemical and
 Biological
 Defense
 Command and
 the Soldier
 Systems
 Command
Redesign the          3                     120     100     194        417
 Army Research
 Laboratory
Decentralize          1     378              21                        400
 and transfer
 depot
 management
 from the
 Industrial
 Operations
 Command to
 individual
 commodity
 commands
Reengineer the                      111     140      59                310
 Logistics
 Support
 Activity
Privatize                   257                                        257
 software
 activities in
 the
 Communications
 -Electronics
 Command
Reengineer                          148      84                        232
 three
 analytical
 activities
Reduce test                         185                                185
 requirements
 in the Test
 and Evaluation
 Command
Compete the                 178                                        178
 Test,
 Measurement,
 Diagnostics,
 and Equipment
 Activity
Consolidate war             153              22                        175
 reserve sites
 in Europe
Compete base                 24      83      25                        132
 operations in
 the Aviation
 and Missile
 Command, the
 Tank-
 automotive and
 Armaments
 Command and
 the
 Communications
 -Electronics
 Command
Compete                      66                                        66
 positions
 involved in
 ammunition
 demilitarizati
 on
Reduce                        4       9      19                        32
 positions at
 various
 ammunition
 plants
================================================================================
Total                70   1,732   1,621   1,989   1,998   1,120       8,530
Percent\a             1      20      19      23      23      13        100
--------------------------------------------------------------------------------
\a Percent figures do not add exactly due to rounding. 

Source:  Army data. 


AMC plans to restructure its commodity commands through competitive
sourcing studies, privatization of selected functions, and
reengineering business processes.  The commodity commands include the
Aviation and Missile Command, the Communications-Electronics Command,
and the Tank-automotive and Armaments Command.  Likewise, the
research, development, and engineering restructure initiative
involves reorganizing and restructuring the research centers to focus
on critical core competencies as well as conducting competitive
sourcing studies on selected functions.  The initiative involves the
same commands as well as the Soldier and Biological Chemical Command. 

In addition to these initiatives, the Army is considering a much
broader reorganization of AMC.  However, details of this proposed
reorganization were not made available to us; therefore, we were
unable to assess any potential impact such a reorganization may have
upon existing personnel requirements. 


--------------------
\4 Defense Reform Initiative Directive 20 required DOD organizations
to review all of their positions involved in performing commercial
activities and identify those that could be subject to a competitive
sourcing study. 


      REDUCTIONS IN FISCAL YEAR
      1999 AND 2000
---------------------------------------------------------- Letter :3.2

AMC expects to eliminate about 1,800 positions during fiscal years
1999 and 2000.  In fiscal year 1999, it plans to eliminate 70
positions of which, about half will be obtained by eliminating vacant
positions in headquarters.  The remaining 1,732 positions are to be
eliminated in fiscal year 2000 through a combination of factors,
including competitive sourcing studies and ongoing initiatives to
decentralize and transfer responsibility for managing the depots from
the Industrial Operations Command to individual commodity commands,
consolidate war reserve sites in Europe, and merge two commands.\5
However, some of the initiatives may not be implemented during fiscal
year 2000 as planned.  Table 2 shows that 713, or 41 percent, of the
1,732 reductions planned for fiscal year 2000 could be delayed and a
final decision has not been made regarding another 257 positions. 



                                Table 2
                
                  Status of Initiatives to Achieve QDR
                     Reductions in Fiscal Year 2000

                                       Number of positions
                            ------------------------------------------
                                On  Delaye           Decision
Initiative                    time       d           pending
--------------------------  ------  ------  --------------------------
Competitive sourcing:
 Base operations                       469
 Test, measurement,                    178
 diagnostics, and                       66
 evaluation
 Ammunition
 demilitarization
Privatize software                                     257
 activities
Transfer responsibility        378
 for depot management
Consolidate war reserve        153
 sites
Merge two commands             131
Other                          100
======================================================================
Total                          762     713             257
Percent                         44      41              15
----------------------------------------------------------------------
Source:  Our analysis of Army data. 

The primary reason some initiatives are being delayed is that
competitive sourcing studies are taking longer to complete and
implement than planned.  AMC officials stated that they are assessing
options to deal with the impact of these delayed studies.  AMC also
planned to eliminate 24 positions in fiscal year 2000 through
competitive sourcing studies of some base operations functions in the
Aviation and Missile and the Tank-automotive and Armaments Commands. 
However, officials at these commands stated that they now plan to
eliminate vacant positions rather than conduct the studies. 

As shown in table 2, AMC plans to privatize some software design
activities in the Communication-Electronics Command that would
eliminate 257 positions.  Under this initiative, the Army wants to
modernize its wholesale logistics functions by awarding a long-term
contract to a single vendor that will (1) operate the Army's existing
wholesale logistics software system, (2) reengineer the wholesale
logistics business processes, and (3) customize a commercial
off-the-shelf software system, which it will operate.  However, to
implement this initiative, AMC sought a waiver to Circular A-76
requirements.  At the time we completed our work, the Army had not
approved or disallowed the waiver. 



--------------------
\5 The Chemical and Biological Defense Command and the Soldier
Systems Command were merged into the Soldier and Biological Chemical
Command. 


      REDUCTIONS IN FISCAL YEARS
      2001 TO 2004
---------------------------------------------------------- Letter :3.3

AMC has identified initiatives to eliminate the remaining 6,728
positions between fiscal year 2001 and 2004.  Most of these
reductions depend primarily on AMC's ability to restructure the
commodity commands, redesign the research, development and evaluation
centers, and complete competitive sourcing studies on its arsenals. 
These three initiatives account for 4,174, or 62 percent, of the
planned reductions. 

AMC plans to eliminate 1,972 positions under the initiative to
redesign its commodity commands.  Our work at two of the three
commodity commands indicates that plans to achieve the reductions are
still being developed.  For example, the Tank-automotive and
Armaments Command plans to reengineer its business processes and
implement an integrated data environment to absorb the reductions. 
According to Tank-automotive and Armaments officials, the Command
plans to implement its new organizational structure in fiscal year
1999, and then start to identify and prioritize the various business
practices to be reengineered.  The Aviation and Missile Command plans
to achieve its reductions primarily through implementing the prime
vendor support concept\6 on selected systems.  The Apache was
selected as the first system; however, the implementation plan is
still under review within the Army.\7 An Aviation and Missile Command
official stated that the Command's ability to achieve the reductions
relies primarily on replicating the Apache concept to other weapon
systems. 

Another major initiative involves plans to redesign the research,
development, and engineering centers and eliminate 1,567 positions. 
To achieve its reductions, the Aviation and Missile Command plans to
combine the aviation and missile research centers and eliminate
positions at some satellite locations and some performing lower
priority work.  Aviation and Missile Command officials stated efforts
are underway to prioritize their workload.  Likewise, the
Tank-automotive and Armaments Command plans to achieve efficiencies
by consolidating similar functions between its two research centers,
as well as through projected decreases in workload. 

AMC expects to eliminate 630 positions in fiscal year 2002 by
conducting competitive sourcing studies at its three arsenals. 
However, Army decisions since the QDR could affect the positions to
be studied.  For example, AMC planned to study about 2,600 positions
at the Rock Island and Watervilet Arsenals, which AMC assumed, would
achieve about 490 of the 630 planned reductions.  However, in fiscal
year 2000, the Army plans to reduce the personnel levels at the two
arsenals by about 680 positions, which would reduce the study
universe to about 1,900 positions.  Using the revised universe and
AMC's assumption of a 20-percent saving, only 380 positions would be
eliminated, or 110 fewer positions than anticipated.  AMC officials
stated that the Army is considering an option to convert the
Watervilet Arsenal to a government-owned contractor-operated
facility, which could impact the ongoing competitive sourcing study. 


--------------------
\6 Prime vendors typically are contractors that buy inventory from a
variety of suppliers, store it in commercial warehouses, and ship it
to customers when ordered.  In the case of the Apache helicopter, the
prime vendor concept is much different in that a contractor provides
all logistics support along with continuous product improvement and
modernization. 

\7 Much controversy and uncertainty surround this initiative in terms
of its cost-effectiveness and impact on other organizations and
entities such as the Defense Logistics Agency and the Army Working
Capital Fund.  It is also the subject of one of our reviews. 


   SAVINGS ARE LIKELY TO BE LESS
   THAN ANTICIPATED AND TAKE
   LONGER TO BE REALIZED
------------------------------------------------------------ Letter :4

The Army expected to achieve cumulative savings of an estimated
$1.4 billion between fiscal year 1999 and 2004 and an estimated $589
million in annual recurring savings thereafter from QDR civilian
reductions in AMC.  While these reductions are expected to achieve
savings, our work indicates that savings in both the short and long
term are likely to be less than expected and take longer to be
realized.  The savings totals will be lower in the short term because
not all of the investment costs required to achieve the reductions
were considered.  Also, some of the savings programmed for fiscal
year 2000 will be delayed because competitive sourcing studies that
are underway are taking longer to complete and implement than
planned.  The Army used higher than average civilian salary costs to
compute the estimated savings.  Further, not all of the savings will
accrue to the Army because some positions to be eliminated are funded
by non-Army activities. 

The estimated savings did not include all the investment costs
required to implement some initiatives.  This will delay savings
being achieved within the estimated time frames.  For example, the
Tank-automotive and Armaments Command requires $35 million to
implement an integrated data environment as part of its plan to
perform its mission with less personnel.  Command officials stated
that these costs are required for contractor support of network and
database management.  Likewise, the Soldier and Biological Chemical
Command plans to install new security equipment at various sites,
which would enable it to reduce the number of security guards. 
According to the Command's Director for Resource Management, the
current estimate for the technology improvements is $10 million. 
Finally, the Army War Reserve Support Command estimates that it will
cost $2.5 million to move equipment to consolidate war reserve
storage sites in Europe. 

The Army also did not fully calculate the personnel separation costs
associated with the QDR reductions in AMC.  On the basis of its
average separation cost\8 of $21,000 per employee, the Army's Office
of Program Analysis and Evaluation programmed separation costs of
about $150 million for 6,980 employees, or 20 percent of the study
universe.  Should AMC increase its competitive study candidates,
these costs could increase significantly.  Assuming that the private
sector continues to win competitions at the historic rate of 50
percent, AMC could transfer work involving between 9,500 and 15,000
positions to the private sector. 

The Army expected to save about $21 million in fiscal year 2000 by
implementing the results of various competitive sourcing studies.  As
previously discussed, these studies may not be completed during
fiscal year 2000, which will delay the savings.  AMC officials stated
that they are reviewing options to fund the affected positions until
the studies are implemented. 

The Army used average salary costs for each fiscal year to estimate
the savings.  The Army assumed that after accounting for reductions,
AMC's average civilian salary costs would still increase 2 percent
per year between fiscal year 1999 and 2005, except in fiscal year
2001, when the average salary would increase by 14 percent.  When we
brought this to the attention of Army officials, they could not
explain the reason for this increase but stated that they are
reviewing the methodology used to compute average civilian salary. 
Had the Army applied a 2-percent increase consistently through fiscal
year 2005, we estimate that the total savings would be reduced by
about $52 million. 

Approximately $303.6 million, or 52 percent, of the estimated
recurring savings is based on eliminating positions that are directly
funded by AMC.  An additional $182.6 million, or 31 percent, of the
estimated recurring savings is based on eliminating positions funded
by other Army organizations; these savings will accrue to the Army
but not specifically to AMC.  The remaining $103 million, or 17
percent, of the estimated recurring savings is based on eliminating
AMC positions that are essentially funded by non-Army organizations
through reimbursements for services provided.  While this will reduce
personnel levels in AMC, the dollar savings will accrue to other
organizations.  For example, the Army is reimbursed for missile tests
that it conducts for the Air Force or the Navy.  According to AMC
officials, the personnel reductions should not affect the
reimbursable work because they expect to continue to do the work with
fewer personnel. 


--------------------
\8 This average covers the costs of voluntary early retirement,
voluntary separation incentives, and involuntary separations through
reduction-in-force procedures. 


   IMPACT OF REDUCTIONS HAS BEEN
   LIMITED
------------------------------------------------------------ Letter :5

Since most of the QDR reductions will occur between fiscal year 2001
and 2004, the impact on workload and readiness of these future
reductions is yet to be determined.  AMC officials, while expressing
concerns about challenges they face in meeting the QDR and ongoing
reductions, could not point to any significant effects to date other
than employee morale.  AMC officials stated that the ongoing
reductions continue to have only marginal impacts on operations,
which they have dealt with so far through various reorganizations and
reengineering actions. 

The majority of the reductions in fiscal year 2000 should not impact
workload because they are based on competitive sourcing studies and
efforts to streamline commands.  Our prior work has shown that
initiatives such as competitive sourcing studies and others that
emphasize identifying more efficient organizations often provide
opportunities to complete existing workload with fewer employees.  In
addition, some of the out-year reductions should inherently have no
impact on workload because they are based on projected workload
decreases.  For example, the Soldier and Biological Chemical
Command's plan to eliminate 178 positions in the chemical agent
destruction activity is based on projected decreases in workload in
fiscal year 2004.  Similarly, the Tank-automotive and Armaments
Command's plan to eliminate about 300 positions is based on projected
workload decreases in fiscal years 2003 and 2004. 

The QDR reductions do not represent the latest reductions to AMC's
personnel.  After the QDR, the Army reduced AMC's civilian staffing
by another 2,000 positions between fiscal year 2000 and 2005. 
Furthermore, the Army Vice Chief of Staff established a team to
identify options to make AMC more efficient.  As indicated earlier,
we were not able to obtain any information on the options being
considered. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

AMC has identified various initiatives to achieve the QDR reductions;
however, plans for some of the initiatives are yet to be finalized. 
Even so, it appears that AMC has enough options to help achieve its
reduction goals by fiscal year 2004.  However, the reductions will
save less than estimated.  Delays in initiating some of the planned
initiatives and not fully accounting for the investment costs
required to implement these actions will likely delay the onset of
planned savings.  Additionally, other factors are likely to mean less
overall savings than initially estimated.  Lastly, AMC officials
state that the reductions to date have had only marginal impact on
performance, which they have been able to deal with.  However, it is
too early to assess the impact for about 80 percent of the reductions
that are scheduled to occur from fiscal year 2001 through 2004. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We requested comments on a draft of this report from the Secretary of
Defense.  On March 30, 1999, Office of the Secretary of Defense
officials told us that the Department concurred with the report
without additional comments. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To obtain information on AMC's plans to achieve the QDR reductions,
we interviewed officials and reviewed documents at AMC Headquarters,
the Aviation and Missile Command, Huntsville, Alabama; the
Tank-automotive and Armaments Command, Warren, Michigan; the
Industrial Operations Command, Rock Island, Illinois; the Soldiers
Biological and Chemical Command, Aberdeen, Maryland; and the Test and
Evaluation Command, Aberdeen, Maryland.  To obtain information on the
estimated savings, we interviewed officials and reviewed documents
from the Army's Office of Program, Analysis and Evaluation and AMC's
Office of Resource Management.  We obtained information on additional
investment costs from officials in the Tank-automotive and Armaments
Command, the Soldiers Biological and Chemical Command, and the Army
War Reserve Support Command.  To obtain information on the impact of
the reductions on workload and readiness, we interviewed AMC's Chief
of Staff and officials at the various commands visited who were
responsible for implementing the initiatives.  In addition, we
reviewed the impact statements that AMC headquarters prepared for the
QDR initiatives. 

We conducted our review from December 1998 to February 1999 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Honorable William S. 
Cohen, Secretary of Defense; the Honorable Louis Caldera, Secretary
of the Army; the Honorable William J.  Lynn, Under Secretary of
Defense (Comptroller); and the Honorable Jacob Lew, Director, Office
of Management and Budget.  Copies will also be available to others
upon request. 

If you or your staff have any questions concerning this report,
please contact me at (202) 512-8412 or my Associate Director, Barry
Holman, at (202) 512-5581.  Major contributors to this report were
William Crocker, Michael Kennedy, and Richard Irving. 

David R.  Warren, Director
Defense Management Issues

List of Congressional Committees

The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Ted Stevens
Chairman
The Honorable Daniel Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

The Honorable Jerry Lewis
Chairman
The Honorable John Murtha
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives


THE A-76 PROCESS
=========================================================== Appendix I

In general, the A-76 process consists of five 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; and (5)
evaluating the proposals or bids and comparing the in-house estimate
with a private-sector offer or an interservice support agreement and
selecting the winner of the cost comparison.  Additionally, appeals
may be submitted. 

Figure I.1 shows an overview of the process.  The solid lines
indicate the process used when the government issues an Invitation
for Bids requesting firm bids 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. 
While it may not be appropriate for use in all cases, this type of
process is often used when a commercial activity involves high levels
of complexity, expertise, and risk. 

   Figure I.1:  Overview of the
   A-76 Process

   (See figure in printed
   edition.)

   Source:  Air Force Air
   Education and Training Command
   documents.

   (See figure in printed
   edition.)


The circular requires the government to develop a performance work
statement.  This statement, which is incorporated into either the
Invitation for Bids or the Request for Proposals, serves as the basis
for both government estimates and private sector offers.  If the
Invitation for Bid process is used, each private sector company
develops and submits a bid, giving its firm 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.  On the basis of 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 and the bids of all private sector firms. 

According to Office of Management and Budget's A-76 guidance, the
government's in-house estimate wins the competition unless the
private sector's offer meets a threshold of savings that is at least
10 percent of direct personnel costs or $10 million over the
performance period.  The Office of Management and Budget established
this minimum cost differential to ensure that the government would
not contract out for marginal estimated savings. 

If the Request for Proposals--best value process--is used, the
Federal Procurement 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 a
cost estimate that are 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) cost to do
the work.  After this review is completed, the selection authority
prepares a written justification supporting its decision.  This
justification 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 offer and determines whether
it can achieve the same level of performance and quality as the
selected private sector proposal.  If not, the authority asks the
government to change its estimate to meet the performance standards
accepted by the authority.  This ensures 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 determining that the
offers are based on the same level of performance, the cost estimates
are compared.  As with the Invitation for Bids process, the work will
remain in-house unless the private offer is (1) 10 percent less in
direct personnel costs or (2) $10 million less over the performance
period. 

Following an A-76 cost comparison decision, participants in the cost
comparison may appeal the selection authority's decision if they
believe the government has not complied with the requirements and
procedures of A-76 or question the costs entered by the government on
the applicable cost comparison form. 


ARMY MATERIEL COMMAND QUADRENNIAL
DEFENSE REVIEW REDUCTION GOALS BY
ORGANIZATION
========================================================== Appendix II

                                                          Pre-
                                                           QDR
                                                        fiscal
                                                          year  Percen
                                                   QDR    2003       t
                                                reduct  baseli  reduct
Organization                                       ion      ne     ion
----------------------------------------------  ------  ------  ------
Industrial Operations Command\a                  1,819  19,510       9
Tank-automotive and Armaments Command            1,391   7,480      19
Communications-Electronics Command               1,322   7,149      19
Aviation and Missile Command                     1,317   7,107      19
Test and Evaluation Command                        730   4,860      15
Chemical and Biological Defense Command\b          448   2,701      17
Army Research Laboratory                           417   2,370      18
Logistics Support Activity                         310     739      42
Army Materiel Command Headquarters                 200     784      26
Army Materiel Systems Analysis Activity            143     297      48
Soldier System Command\b                           131     954      14
Simulation and Training Command                     96     510      19
Separate Reporting Activities                       74     348      21
Logistics Integrated Activity                       57      92      62
Management Engineering Activity\c                   32      66      48
U.S. Army Security Assistance Command               31     541       6
Test Directorate                                    12      62      19
Army Research Office\d                               0     115       0
======================================================================
Total                                            8,530  55,685      15
----------------------------------------------------------------------
\a This command includes personnel at the five depots that were later
transferred to other major subordinate commands in the Army Materiel
Command. 

\b These commands were later merged into the Soldier and Biological
Chemical Command. 

\c This activity was later combined with the U.S.  Army Material
Systems Analysis Activity. 

\d This office was later merged with the Army Research Laboratory. 

Source:  Army data. 


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