Future Years Defense Program: How Savings From Reform Initiatives Affect
DOD's 1999-2003 Program (Letter Report, 02/25/99, GAO/NSIAD-99-66).

Pursuant to a legislative requirement, GAO provided information on the
Department of Defense's (DOD) Future Years Defense Program (FYDP),
focusing on: (1) whether savings in DOD's fiscal year (FY) 1999-2003
FYDP were the result of DOD's Defense Reform Initiatives (DRI); (2) the
extent to which savings and personnel reductions from competitive
sourcing in the 1999-2003 FYDP were based on ongoing or planned studies
of functions specifically identified under the Office of Management and
Budget Circular A-76, and what percentage of the current costs of
performing those functions were included from the projected savings from
these studies; and (3) whether DOD components outsourced activities that
included inherently governmental functions, without allowing civilian
employees to compete under Circular A-76 procedures, or without
following the study and notification requirements of 10 U.S.C. 2461.

GAO noted that: (1) DOD expects savings from individual DRIs, but has
not incorporated specific savings in the 1999-2003 FYDP from these
initiatives, except in the areas of competitive sourcing and estimates
relating to future base realignment and closure (BRAC) decisions; (2)
DOD's 1999-2003 FYDP incorporated $6.2 billion of estimated savings from
competitive sourcing between FY 1997 and 2003, but these estimated
savings do not fully account for up-front investment costs, which could
reduce the amount of actual savings in the short term; (3) the FYDP does
provide a fuller estimate of the impact of investment costs associated
with BRACs; (4) while DOD has requested additional BRAC rounds, Congress
has not authorized them; (5) the Office of the Secretary of Defense
expects DRIs to reduce personnel requirements but has not required the
services to link specific reductions with individual initiatives; (6)
savings from competitive sourcing reflected in the 1999 FYDP were not
linked to specific functions under study or targeted for future studies;
(7) in addition, DOD does not yet have the systems in place that can
provide reliable cost information needed to precisely identify savings;
(8) consequently, it is not feasible to accurately identify the current
costs of functions to be studied or the potential savings as a
percentage of these costs; (9) according to DOD, savings estimates
incorporated in the FYDP represented broad projections based on the
numbers of positions expected to be studied and historic savings data;
(10) GAO's work has shown that historic savings estimates may have
important limitations and may not accurately indicate likely current and
future savings; (11) study plans of most DOD components have evolved
over time, but in many cases they have not linked positions to be
studied to specific functions and locations; (12) firm savings estimates
probably will not be possible until individual studies are completed;
(13) even then, these estimates would be subject to change; (14)
procurement and commercial activities data systems do not identify the
extent to which DOD components may be outsourcing functions without
complying with Circular A-76 procedures or 10 U.S.C. 2461 congressional
reporting requirements; and (15) such cases can be identified only when
they are specifically raised by affected parties.

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

 REPORTNUM:  NSIAD-99-66
     TITLE:  Future Years Defense Program: How Savings From Reform 
             Initiatives Affect DOD's 1999-2003 Program
      DATE:  02/25/99
   SUBJECT:  Military downsizing
             Reductions in force
             Base closures
             Base realignments
             Defense budgets
             Privatization
             Defense cost control
             Future budget projections
             Cost analysis
             Comparative analysis
IDENTIFIER:  DOD Future Years Defense Program
             Defense Reform Initiative
             DOD Quadrennial Defense Review
             
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ns99066.book GAO United States General Accounting Office

Report to the Chairman and Ranking Minority Member, Committee on
Armed Services, House of Representatives

February 1999 FUTURE YEARS DEFENSE PROGRAM

How Savings From Reform Initiatives Affect DOD's 1999- 2003
Program




GAO/NSIAD-99-66

  GAO/NSIAD-99-66

United States General Accounting Office Washington, D. C. 20548
Lett er

Page 1 GAO/NSIAD-99-66 Future Years Defense Program

GAO

National Security and International Affairs Division Lett er

B-281980 February 25, 1999 The Honorable Floyd D. Spence Chairman
The Honorable Ike Skelton Ranking Minority Member Committee on
Armed Services House of Representatives

In its report on the National Defense Authorization Act for Fiscal
Year 1999, the House Committee on Armed Services 1 noted that
prior Department of Defense (DOD) reform initiatives had not
generated the anticipated savings

and had created difficulties because of premature budget
reductions. 2 Accordingly, the report directed that we provide
answers to a series of questions pertaining to the support for
savings and personnel reductions contained in DOD's fiscal year
1999 budget request and out- year budget plans. This report
addresses the following questions:  What savings in DOD's fiscal
years 1999- 2003 Future Years Defense

Program (FYDP) 3 were the result of the Department's Defense
Reform Initiatives (DRI)?  To what extent were the savings and
personnel reductions from

competitive sourcing 4 in the 1999- 2003 FYDP based on ongoing or
planned studies of functions specifically identified under Office
of Management and Budget (OMB) Circular A- 76, and what percentage
of the current costs of performing those functions were included
from the

projected savings from these studies?  Did Defense components
outsource activities that included inherently governmental
functions, without allowing civilian employees to 1 Formerly the
House National Security Committee.

2 House Report 105- 532, May 12, 1998. 3 The FYDP is an
authoritative record of current and projected force structure,
costs, and personnel levels approved by the Secretary of Defense.
In its annual FYDP documents, which in accordance with 10 U. S. C.
221 have been provided to the Congress since 1988, DOD presents
its estimated expenditures and appropriations needs for the budget
year for which funds are being requested, for the previous 2
years, and for at least the following 4 years. The fiscal year
1999 FYDP supports the President's fiscal year 1999 budget
request. 4 While the phrase outsourcing is sometimes used, we
chose to use competitive sourcing to reflect

competition between the public and private sector.

B-281980 Page 2 GAO/NSIAD-99-66 Future Years Defense Program

compete under Circular A- 76 procedures, or without following the
study and notification requirements of 10 U. S. C. 2461?

Results in Brief DOD expects savings from individual Defense
Reform Initiatives, but has not incorporated specific savings in
the 1999- 2003 FYDP from these initiatives, except in the areas of
competitive sourcing and estimates

relating to future base realignment and closure (BRAC) decisions.
DOD's 1999- 2003 FYDP incorporated $6.2 billion of estimated
savings from competitive sourcing between fiscal year 1997 and
2003, but these

estimated savings do not fully account for up- front investment
costs, which could reduce the amount of actual savings in the
short term. The FYDP does provide a fuller estimate of the impact
of investment costs associated with BRACs. For example, the 1999-
2003 FYDP offsets estimated BRAC savings with implementation costs
and comes up with net costs of $832 million for fiscal year 2002
and $1. 45 billion for fiscal year 2003. While DOD has requested
additional BRAC rounds, the Congress has not authorized them. 5
The Office of the Secretary of Defense expects its DRIs to reduce
personnel requirements but has not required the services to link

specific reductions with individual initiatives. Some services,
however, have linked projected personnel reductions with their
competitive sourcing studies.

Savings from competitive sourcing reflected in the 1999 FYDP were
not linked to specific functions under study or targeted for
future studies. In addition, DOD does not yet have the systems in
place that can provide

reliable cost information needed to precisely identify savings.
Consequently, it is not feasible to accurately identify current
costs of functions to be studied or the potential savings as a
percentage of these costs. According to DOD, savings estimates
incorporated in the FYDP represented broad projections based on
the numbers of positions expected to be studied and historic
savings data. 6 Our work has shown that historic savings estimates
may have important limitations and may not accurately

5 DOD included an estimate of the net of future BRAC costs and
savings in its 1999- 2003 FYDP, as it was seeking authority from
the Congress for additional BRAC rounds. 6 The number of positions
has generally increased over time, but appears to have fluctuated
much more than the projected savings. For example, the projected
cumulative savings of approximately $6 billion has remained in
that range for the past 2 years, while the number of positions
expected to be studied has ranged from a low of about 171,000 to a
high of 237,000 and was only recently changed to 229, 000 by

fiscal year 2005.

B-281980 Page 3 GAO/NSIAD-99-66 Future Years Defense Program

indicate likely current and future savings. Study plans of most
Defense components have evolved over time, but in many cases they
have not linked positions to be studied to specific functions and
locations. Firm savings estimates probably will not be possible
until individual studies are

completed. Even then, these estimates would be subject to change.
Procurement and commercial activities data systems do not identify
the extent to which Defense components may be outsourcing
functions without complying with Circular A- 76 procedures or 10
U. S. C. 2461

congressional reporting requirements. Currently, such cases can be
identified only when they are specifically raised by affected
parties.

Background In May 1997, DOD completed a comprehensive review of
national security threats, risks, and opportunities facing the
United States to 2015. This review, known as the Quadrennial
Defense Review (QDR), was intended to examine America's defense
needs and provide a blueprint for a strategybased, balanced, and
affordable defense program. The QDR noted that DOD had reduced
active duty personnel by 32 percent between 1989 and

1997 while reducing personnel performing infrastructure functions
by only 28 percent. The report called for additional reductions in
both military and civilian personnel. Our July 1998 report on the
1999- 2003 FYDP noted that the services planned to reduce military
and civilian personnel by 175,000

and save $3.7 billion by 2003. Our recent reviews of planned
Defense personnel reductions resulting from the QDR and the 1999-
2003 FYDP raised questions about DOD's ability to achieve some of
these reductions and savings. 7 The changes in military strategy
and capabilities enunciated in the QDR

and other reports have often been referred to as a revolution in
military affairs. However, the QDR also recognized that DOD must
undergo a similar revolution in its business affairs. To that end,
the Secretary of Defense chartered a study effort that resulted in
the November 1997 DRI report. The report emphasized the need to
reduce excess Cold War infrastructure to free up resources for
modernization. The report identified

numerous initiatives to reengineer business practices, consolidate
organizations, eliminate unneeded infrastructure through
additional base

7 Quadrennial Defense Review: Some Personnel Cuts and Associated
Savings May Not Be Achieved (GAO/NSIAD-98-100, Apr. 30, 1998) and
Future Years Defense Program: Substantial Risks Remain in DOD's
1999- 2003 Plan (GAO/NSIAD-98-204, July 31, 1998).

B-281980 Page 4 GAO/NSIAD-99-66 Future Years Defense Program

closures, and conduct public/ private competitive sourcing studies
for commercial activities. Most of the potential savings
identified in the report were expected to result from BRACs and
competitive sourcing studies. Future BRAC actions were contingent
on the Congress enacting legislation authorizing additional
closures, while competitive sourcing studies were to be completed
under the policy guidance of OMB. The concept of competitive
sourcing is not new. Through the 1980s, DOD encouraged the
services and Defense agencies to conduct competitions between the
public and private sectors to determine who would be responsible
for performing selected functions that were being provided by in-
house staff. These competitions were to be done under OMB Circular

A- 76. Although DOD's use of Circular A- 76 was limited from the
early to mid- 1990s, in 1995 DOD reestablished the competition
program in the hope of obtaining significant savings that could be
used to fund modernization and other priority needs.

Circular A- 76 and its supplemental handbook specify a process to
develop a statement that defines the work to be done and a
comparison of in- house costs with contractor costs to determine
who should perform the work. Circular A- 76 is limited to
competitions for the conversion of recurring commercial
activities. The handbook identifies circumstances under which
detailed cost studies may not be required, such as for the
conversion

from performance by military personnel to contractor performance
or if the number of affected civilian positions is below a
specific threshold. It also indicates instances in which Circular
A- 76 may not apply, such as for restructured or reengineered
functions. Appendix I contains a more detailed description of the
A- 76 process.

In addition, several laws affect competitive sourcing. Some, such
as 10 U. S. C. 2461 and 2462, affect the process of transferring
work currently being performed by civilian government employees to
the private sector. Section 2461, as amended by the National
Defense Authorization Act for

Fiscal Year 1999 (P. L. 105- 261), requires an analysis of the
activity and a comparison of the costs of having the activity
performed by DOD civilian employees and by a contractor to
determine whether changing to contractor performance will save
money. It also requires that DOD notify the Congress of this
analysis and provide other information before making

B-281980 Page 5 GAO/NSIAD-99-66 Future Years Defense Program

a change in performance. 8 Section 2462 requires the Secretary of
Defense to obtain needed supplies or services from the private
sector, if a private- sector source can provide the supply or
service at less cost, and establishes criteria for conducting the
cost comparison. FYDP Shows Partial

Costs and Savings Estimates From BRAC and Competitive Sourcing

DOD expects savings from individual DRIs but has not incorporated
specific savings from these initiatives in the FYDP, except in the
areas of potential BRAC and competitive sourcing. Both have
significant up- front investment costs that can limit net savings
in the short term. The 1999- 2003

FYDP shows a more complete accounting of these investment costs
for potential BRACs than it does for competitive sourcing, but the
latter provides the majority of DRI savings incorporated in the
FYDP. While personnel reductions are programmed in the 1999- 2003
FYDP and are expected to represent a portion of savings from DRIs,
DOD has not required the services to link specific personnel
reductions to individual initiatives. Some services, however, have
projected personnel reductions

in conjunction with competitive sourcing studies. FYDP Shows Net
Costs for Early Years of Implementing Any New BRAC Rounds

We previously reported that BRAC actions can provide the basis for
significant savings in infrastructure costs. 9 However, while
savings can begin to accrue even as costs are being incurred to
implement BRAC decisions, it can take several years for net
savings to begin accruing on an annual recurring basis. The 1999-
2003 FYDP reflects this situation,

showing a net cost for projected BRAC decisions between fiscal
year 1999 and 2003.

The 1999- 2003 FYDP incorporated some savings from future BRAC
rounds, but these savings were offset by implementation costs,
resulting in net costs of $832 million for fiscal year 2002 and
$1.45 billion for fiscal

year 2003. DOD showed these net costs in the FYDP as a Department-
level contingency account but did not allocate them to individual
services. Beyond the FYDP period, DOD expects the two additional
rounds of base 8 Section 8014 of the DOD Appropriations Act for
Fiscal Year 1999 (P. L. 105- 262) requires that DOD

certify its in- house estimate to congressional committees before
converting any activity performed by more than 10 DOD civilian
employees to contractor performance.

9 Military Bases: Review of DOD's 1998 Report on Base Realignment
and Closure (GAO/NSIAD-99-17, Nov. 13, 1998) and Military Bases:
Status of Prior Base Realignment and Closure Rounds (GAO/NSIAD-99-
36, Dec. 11, 1998).

B-281980 Page 6 GAO/NSIAD-99-66 Future Years Defense Program

closures to result in about $3. 4 billion in annual savings after
the closures are completed and implementation costs have been
offset. 10

We reported in November that DOD's method of estimating costs and
savings for future BRAC rounds was limited, principally because it
assumed that savings from future base closures would closely
resemble savings from the 1993 and 1995 BRAC rounds, adjusted for
inflation. While

DOD's estimate may be appropriate for planning purposes, its
precision is limited because the costs of future BRAC rounds might
not parallel those of the prior two rounds. Previous base closures
frequently involved facilities that were of low military value and
were the least costly to implement. Often those closures required
the shortest time for savings to offset

implementation costs. Generally, DOD did not choose to close
facilities that required higher implementation costs or longer
periods to recover savings. More precise cost estimates will
probably not be available until DOD actually studies
implementation scenarios for specific BRAC actions and puts in
place more reliable cost accounting systems. However, BRAC

history suggests that future implementation costs could be greater
than those in previous rounds and the closures could thus take
longer to produce net recurring savings.

Projected Competitive Sourcing Savings Are Significant but Do Not
Fully Account for Investment

Costs DOD's 1999- 2003 FYDP projected $6. 2 billion in savings
from competitive

sourcing between fiscal year 1997 and 2003. However, as we
previously reported, the projected savings do not fully account
for the up- front investment costs associated with completing the
studies and implementing the results. Though recurring savings
from competitive sourcing could be substantial in the long term,
it will take longer to begin achieving these savings than DOD has
projected, and net savings during the 1999- 2003 period will be
less than projected.

In formulating their fiscal year 1999 budget, Defense components
identified over 200,000 positions that would be subjected to
competitive sourcing studies between 1997 and 2003. Table 1 shows
the projected savings and the number of positions to be studied by
fiscal year as summarized in documents supporting the President's
fiscal year 1999 budget submission.

10 Future BRAC savings are expressed in fiscal year 1999 dollars
and represent savings expected to recur annually for fiscal year
2012 and beyond, when the two proposed future rounds are projected
to be completed. DOD estimated future savings on the assumption
that future costs and savings will be

similar to those of the 1993 and 1995 rounds.

B-281980 Page 7 GAO/NSIAD-99-66 Future Years Defense Program

Table 1: Programmed Savings and Positions to be Studied for
Competitive Sourcing, Fiscal Years 1997- 2003

a Includes savings for individual services and Defense agencies. b
The President's Fiscal Year 2000 budget request adjusted the
number of positions to be studied to 229,000 and extended the
years of study out to 2005. Source: DOD

Our February 1999 report on competitive sourcing goals noted that,
like BRACs, competitive sourcing studies and implementing actions
require up- front investments that should be considered when
estimating net savings. 11 We also reported that the estimates of
competition savings provided to the Congress in 1998 had
limitations and that several factors

were likely to reduce savings in the short term. We further noted
that DOD had not fully identified the resources associated with
the studies or the personnel separation costs likely to be needed
for implementation. The Navy was the only component that had
deducted some estimated investment costs when calculating the
savings presented to the Congress in DOD's April 1998 report on
competitive sourcing.

Linkage of Specific Personnel Reductions With Individual Defense
Reform Initiatives Is Limited

Personnel reductions are programmed in the 1999- 2003 FYDP and are
expected to represent a portion of savings from DRIs. DOD
officials told us that they had not required the services to
target specific personnel reductions to individual initiatives.

The Army programmed a reduction of 9, 600 civilian staff on the
assumption that 20 percent of the positions studied would be
eliminated. The Army programmed the 20- percent reduction based on
the assumption that the 20- percent savings would result whether
the government or a contractor won the A- 76 competitions. Army
officials said they made this assumption because they did not want
to be seen as preselecting the winner. The Army

recognizes, however, that it will likely separate more personnel
based on

Dollars in millions

Fiscal year 1997 1998 1999 2000 2001 2002 2003 Total

Projected savings $24 $59 $205 $532 $1, 184 $1, 831 $2,320 $6, 155
a Positions to be studied 26, 200 55,300 59,600 45, 400 25, 400
1,100 1, 100 214,100 b

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

B-281980 Page 8 GAO/NSIAD-99-66 Future Years Defense Program

the historical trends of contractors winning about 50 percent of
the competitions. The Army did not program any reductions in
military positions as a result of competitive sourcing and planned
to make up for military personnel shortages elsewhere by
transferring the military personnel from positions competed to
other military duties.

The Navy and the Marine Corps did not program any potential
military or civilian personnel cuts as a result of competitive
sourcing. According to Navy officials, the Navy's overall
objective is to achieve savings through competition, and personnel
savings are a consequence and not a goal of the program. Further,
Navy officials said they believed that establishing a goal for
personnel reductions would send a negative message to staff and
would affect morale.

The Air Force was more aggressive in identifying personnel
reductions from competitive sourcing and programmed about 26, 000
military and 19, 300 civilian position reductions between fiscal
year 1997 and 2003, according to its final budget submission. The
Air Force's programmed reduction of all military positions to be
competed was based on the belief that if a position could be
competed, it did not have to be staffed by military personnel.
Generally, the Air Force programmed reductions in civilian
positions on the assumption that private contractors would win 60
percent of the competitions and that the competitions would last 2
years.

Officials at the Office of the Secretary of Defense (OSD) were
aware that the services used different methods to show the effects
of competitive sourcing on personnel and funding and that the
fiscal year 1999 FYDP reflects these different approaches. The
Deputy Under Secretary for Industrial Affairs and Installations
established a task force to ensure that consistent and comparable
approaches are used to estimate personnel and

dollar savings in future budget submissions. Subsequently, the
Acting Director of the Office of the Secretary of Defense's
Program Analysis and Evaluation Office issued guidance
incorporating the task force's recommendations, which required
Defense components to program both

dollar savings and personnel reductions for the 2000- 2005 FYDP.
Further, the DOD Comptroller required Defense components to
specifically identify investment and transition costs and report
both gross and net savings in their fiscal year 2000 budget
submissions.

B-281980 Page 9 GAO/NSIAD-99-66 Future Years Defense Program

Competitive Sourcing Savings Were Projected Using Historic

Experience But Were Not Linked to Specific Study Plans Savings
from ongoing and future competitive sourcing studies as projected
in the 1999 FYDP were the result of broad- based estimates drawn
from previous experience. When the FYDP was being prepared, the
projections

were not linked to specific functions then under study or planned
for future study. Consequently, it is not feasible to link
projected savings with the current cost of individual functions.
In previous reports, we urged caution

in the use of historical savings assumptions in the absence of any
efforts to adjust these assumptions for changes that can occur
over time and that may reduce savings. The 1999- 2003 FYDP was not
based on detailed competitive sourcing plans developed by the
services and other Defense components. These plans continue to
evolve, and specific functions to be studied by location are
mostly yet to be determined. Historic Data Used to

Project Future Savings The estimated competitive sourcing savings
included in the 1999- 2003 FYDP were largely based on numbers of
positions expected to be studied,

average personnel costs per position, and average savings rates
estimated by using historical data from prior competitions.
Savings rates varied among the services. Our previous work has
already shown that there are important limitations to using
historical savings estimates because they may not provide an
accurate indication of likely future savings. The services' cost
savings estimates ranged between 20 and 30 percent; the

Navy projected savings of more than 30 percent where functions
performed by military personnel would be competed. These
estimates, as shown in table 2, represented what the services
believed to be conservative

achievable savings based on historical experience.

B-281980 Page 10 GAO/NSIAD-99-66 Future Years Defense Program

Table 2: Comparison of Programmed Savings Rates Used by the
Services in the 1999- 2003 FYDP a The Navy's programmed savings
rate is a composite rate based on the projection that competing
functions currently performed by civilian personnel would yield
25- percent savings and competing functions currently performed by
military personnel would yield 50- percent savings. Sources:
Military services' data.

While we believe that competitive sourcing competitions are likely
to produce savings, we have previously urged caution when
estimating the amount of savings likely to be achieved. 12 The
estimates used in the FYDP are based on savings estimates
calculated at the end of competitive

sourcing competitions. These estimates can change over time
because of changes in the scope of the work or mandated wage
increases. We previously noted that continuing budget and
personnel reductions could make it difficult to sustain the levels
of previously projected savings. We also recognized that larger
savings are likely to occur when positions filled by military
personnel are converted to civilian or contractor performance.
Finally, we previously noted limitations in DOD's efforts and
capabilities to track changes in program costs and savings after
the results of competitions are implemented. Actual savings data
has not been captured. Our February 1999 report noted the need for
improvements in the

databases used to record the results of competitive sourcing
competitions. 13 Service Programmed rate of cost savings (percent)

Air Force 25 Army 20 Marine Corps  Contractor wins  Remains in-
house 30

20 Navy 31 a

12 Base Operations: Challenges Confronting DOD as It Renews
Emphasis on Outsourcing (GAO/NSIAD-97-86, Mar. 11, 1997), Defense
Outsourcing: Challenges Facing DOD as It Attempts to Save Billions
in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997), and
Defense Management: Challenges Facing DOD in Implementing Defense
Reform Initiatives (GAO/ T- NSIAD/ AIMD- 98- 122,

Mar. 13, 1998). 13 DOD Competitive Sourcing: Results of Recent
Competitions (GAO/NSIAD-99-44, Feb. 23, 1999).

B-281980 Page 11 GAO/NSIAD-99-66 Future Years Defense Program

Specific Study Plans Continue to Evolve

Study plans of most Defense components linking the number of
positions to be studied with specific functions and locations are
still evolving, and estimated savings will not be known until the
studies are completed. Consequently, it is not feasible to
identify the current costs of functions to be studied and their
potential savings rates. In our February 1999 report, we concluded
that clearer indications of actual savings will require that
Defense components develop mechanisms to track actual savings over
time in order to validate continuing savings from completed
competitions.

None of the services based fiscal year 1999 budgets or 1999- 2003
FYDP submissions on a completed multiyear study plan for their
competitive sourcing program, although the Air Force was furthest
along. Our February 1999 report on competitive sourcing goals
noted that most Defense components lacked detailed plans
identifying the numbers of

positions by function expected to be studied over the next few
years. Detailed planning to implement the program has been largely
delegated to components and field activities. These activities are
responsible for determining which specific functions are suitable
candidates for competitions and whether there are sufficient
positions to meet overall competition goals. In addition,
according to service officials, some or all of

the major commands were given numbers of positions to compete and
savings goals, and it is up to them to determine how best to meet
the goals. OSD on December 9, 1998, directed each component to
develop multiyear

competition plans consistent with and presented at the same time
as their fiscal year 2001- 2005 Program Objective Memorandum. OSD
directed that these plans should include, by fiscal year, the
functions and numbers of positions to be competed.

Perceived Efforts to Bypass Circular A- 76 and Related Legislation
Difficult to Identify

The Committee questioned whether Defense components may have
outsourced some activities, possibly even some involving
inherently governmental functions, without following the
procedures of OMB Circular A- 76 or meeting the 10 U. S. C. 2461
requirements for congressional notification. Other than specific
cases brought to our attention, procurement and commercial
activities data systems do not identify the extent to which
Defense components may be outsourcing functions without complying
with these procedures or requirements.

Circular A- 76 does not apply to inherently governmental
activities. Defense components are currently reviewing to what
extent the functions

B-281980 Page 12 GAO/NSIAD-99-66 Future Years Defense Program

performed by DOD personnel are inherently governmental or
otherwise exempted from A- 76 competitive sourcing. DOD expects to
report the results to the Congress early this year, but the
results were not available for

our review when we completed our work. We have been asked to
review two reengineering cases, one in the Army and one in the Air
Force, in which affected parties expressed the belief that
Circular A- 76 procedures and 10 U. S. C. 2461 requirements should
have been followed. We are currently studying these cases and
expect to report on them in the near future.

Conclusions The costs and savings associated with Defense Reform
Initiatives incorporated in DOD's 1999- 2003 FYDP include partial
costs and savings from competitive sourcing and additional BRAC
initiatives. While savings are expected from other initiatives,
DOD has not required the services to calculate the specific
savings to be obtained from them. Likewise, while

personnel reductions are included in the FYDP and some are
expected to result from DRIs, DOD has not required the components
to link any personnel reductions with specific DRI elements. Also,
questions exist about the precision of savings expected from BRAC
and competitive sourcing. DOD assumed there would be additional
base closures; however,

the required legislative authorization has not been given.
Further, the BRAC savings estimate, should future rounds occur,
has limitations in terms of projecting short- term savings that
might be realized. Competitive

sourcing savings incorporated in the 1999- 2003 FYDP were
determined using broad estimates based on prior competitive
sourcing experience, but they were not linked to specific
positions and functions currently under study or planned for study
at specific locations.

There is no systematic way to identify whether components
outsource functions without following the requirements of OMB
Circular A- 76 or the procedures of 10 U. S. C. 2461. Such cases
can be identified only when they are specifically raised.

We are currently reviewing two such allegations and expect to
report on them individually in the near future.

We recently recommended that the Secretary of Defense require
Defense components to assess whether available resources are
sufficient to execute the numbers of planned competitions within
the envisioned time frames and make the adjustments needed to
ensure adequate program execution.

B-281980 Page 13 GAO/NSIAD-99-66 Future Years Defense Program

We also recommended that the Secretary require Defense components
to reexamine and adjust competitive sourcing study targets,
milestones, expected net short- term savings, and planned
operating budget reductions as necessary. Accordingly, we are not
making additional recommendations in this report.

Agency Comments and Our Evaluation

We requested comments on a draft of this report from the Secretary
of Defense. On February 4, 1999, Department and service
representatives from their respective competitive sourcing offices
provided us with the

following comments on the draft. The representatives generally
concurred with the information presented in the report. DOD
officials reiterated their previously stated position that they
have developed an aggressive competitive sourcing program by
planning to compete nearly 229, 000 positions by fiscal year 2005.
They acknowledged that their program has met a number of
challenges; however, they believe none of these challenges are
insurmountable. They stated that through the program and budget
review process, the Department reviews the competitive sourcing
study targets, milestones, and objectives of the program to
measure advancement toward its goals

and that adjustments are made to the program as necessary.
Further, they stated that several important improvement and
oversight tools are being worked into the competitive sourcing
program during calendar year 1999 that will address our concerns.
More specifically, according to these officials, the DOD
Competitive Sourcing Master Plan will, among other things,
identify by fiscal year the functions and number of component
positions to be competed by fiscal year 2005. Also, they stated
each

component is undertaking a series of program improvement
initiatives that includes (1) identifying best practices, (2)
assisting installation/ activity execution, (3) developing
internal communications and training, and (4) improving management
information systems. DOD officials also stated that the components
have not completed enough studies, thus far, to establish a
baseline that would necessitate the reevaluation of their
milestones and objectives and that as more studies are conducted,
they will be able to better refine and adjust their study savings
objectives.

While we support DOD's efforts to institute more comprehensive
oversight tools and program improvement initiatives, we did not
review any of these efforts because they have not yet been fully
implemented, and we are therefore not in a position to comment on
them. However, as we previously reported, we continue to believe
that DOD needs to reassess the

B-281980 Page 14 GAO/NSIAD-99-66 Future Years Defense Program

competitive sourcing study targets, milestones, expected short-
term savings, and planned operating budget reductions now. The
issues involve more than the number of competitions completed;
they also involve the

extent the planned announcements of competitions have been made
and whether there are sufficient resources to complete them. This
is of concern especially because of the large number of studies
planned for announcement in fiscal years 1998 and 1999 and the
delays encountered in getting the fiscal year 1998 studies under
way. If similar delays are

encountered in fiscal year 1999, they could seriously affect
future program execution and DOD's ability to achieve results in a
timely manner. In addition, officials reiterated the Department's
disagreement with our

statement that the precision of its future base closure costs was
limited and that average net costs of future BRAC rounds will be
higher than DOD estimated by using the cost experience of previous
rounds. As we previously reported, our intent was to suggest that
there are reasons to expect greater costs to close bases during
any future implementation

period than during the previous BRAC rounds because many bases
with lower implementation costs and quicker offsets of closure
costs have already been realigned or closed. Thus, the higher
costs likely to be incurred in the future could reduce the net
savings achieved during the implementation period. Nevertheless,
we believe that future BRAC rounds can still result in significant
savings. DOD also provided technical comments on our report, which
we have incorporated as appropriate.

Scope and Methodology To determine the savings included in the
1999- 2003 FYDP that were the

result of DRIs, we reviewed budget documents and discussed the
issue with representatives from the DOD Comptroller's office and
the Army, the Navy, and the Air Force. We also drew on other work
that we had underway or completed relating to competitive sourcing
and the DRI.

To determine the basis used to project competitive sourcing
savings and personnel reductions in the 1999- 2003 FYDP and
whether they were based on studies of specific functions, we
reviewed competitive sourcing budget submissions and the
assumptions underlying the savings calculations. We also held
discussions with service officials responsible for budget
formulation and competitive sourcing program management. Further,
we drew on work we had previously performed to evaluate DOD's
competitive

B-281980 Page 15 GAO/NSIAD-99-66 Future Years Defense Program

sourcing plans and programs, and to review the results of recently
completed competitions.

To determine whether Defense components outsourced inherently
governmental functions without allowing civilian employees to
compete or did not meet the requirements of 10 U. S. C. 2461, we
reviewed pertinent laws and other directives and discussed the
issue with cognizant service officials. We conducted our review
from November 1998 to January 1999 in accordance with generally
accepted government auditing standards.

We are sending copies of this report to the Chairmen of the Senate
Committees on Armed Services and on Appropriations and the House
Committee on Appropriations; the Secretaries of Defense, the Army,
the Navy, and the Air Force; the Commandant of the Marine Corps;
the Director, Office of Management and Budget; and other
interested congressional committees. Copies will be made available
to others upon request. Please contact me at (202) 512- 8412 if
you or your staff have any questions concerning this report. Major
contributors to this report are listed in appendix II.

o

David R. Warren, Director Defense Management Issues

Page 16 GAO/NSIAD-99-66 Furture Years Defense Program

Contents Letter 1 Appendix I The A- 76 Process 18

Appendix II Major Contributors to This Report

22 Tables Table 1: Programmed Savings and Positions to be Studied
for

Competitive Sourcing, Fiscal Years 1997- 2003 7 Table 2:
Comparison of Programmed Savings Rates Used by the

Services in the 1999- 2003 FYDP 10 Figures Figure I. 1: Overview
of the A- 76 Process 19

Abbreviations

BRAC Base Realignment and Closure DOD Department of Defense DRI
Defense Reform Initiative FYDP Future Years Defense Program OMB
Office of Management and Budget OSD Office of the Secretary of
Defense QDR Quadrennial Defense Review

Page 17 GAO/NSIAD-99-66 Furture Years Defense Program

Page 18 GAO/NSIAD-99-66 Future Years Defense Program

Appendix I The A- 76 Process Appendi x I

In general, the A- 76 process consists of six key activities: (1)
developing a performance work statement and quality assurance
surveillance plan; (2) conducting a management study to determine
the government's most efficient organization (MEO); (3) developing
an in- house government cost estimate for the MEO; (4) issuing a
Request for Proposals or Invitation for

Bids; (5) evaluating the proposals or bids and comparing the in-
house estimate with a private- sector offer or interservice
support agreement and selecting the winner of the cost comparison;
and (6) addressing any appeals submitted under the administrative
appeals process, which is designed to ensure that all costs are
fair, accurate, and calculated in the

manner prescribed by the A- 76 handbook. Figure 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 the
commercial activity involves high levels of complexity, expertise,
and risk.

Appendix I The A- 76 Process

Page 19 GAO/NSIAD-99-66 Future Years Defense Program

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

Source: Air Force Air Education and Training Command documents.

Issue performance work statement and RFP or IFB

Compare selected Best Value and MEO technical proposals Prepare
in- house

cost estimate Revise MEO

Revise in- house cost estimate

Compare costs/ select contractor

Most Efficient Organization (MEO) activities Government technical
evaluation activities

MEO management study

Select lowest cost alternative

Additional steps required for request for proposals (RFP) Process
for invitation for bid (IFB)

Prepare technical proposal

Conduct technical evaluation of MEO

Conduct technical evaluation of bids/ proposals Accept

contractor bids/ proposals

Appendix I The A- 76 Process

Page 20 GAO/NSIAD-99-66 Future Years Defense Program

The circular requires the government to develop a performance work
statement. This statement, which is incorporated into either the
Invitation for Bids or Request for Proposals, serves as the basis
for both government estimates and private sector offers. If the
Invitation for Bids process is used, each private sector company
develops and submits a bid, giving its 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. Based on this "most efficient organization," the

government develops a cost estimate and submits it to the
selecting authority. The selecting authority concurrently opens
the government's estimate along with the bids of all private
sector firms.

According to the Office of Management and Budget's (OMB) 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. This minimum cost
differential was established by OMB 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 cost estimate
based strictly on the performance work statement. On the other
hand, private sector proposals can offer a higher level of
performance or service.

The government's selection authority reviews the private sector
proposals to determine which one represents the best overall value
to the government based on such considerations as (1) higher
performance levels, (2) lower proposal risk, (3) better past
performance, and (4) cost to do the work. After the completion of
this analysis, the selection authority prepares a written
justification supporting its decision. This includes the basis for
selecting a contractor other than the one that offered the lowest
price to the government. Next, the authority evaluates the
government's offer and

determines whether it can achieve the same level of performance
and quality as the selected private sector proposal. If not, the
government must then make changes to 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

Appendix I The A- 76 Process

Page 21 GAO/NSIAD-99-66 Future Years Defense Program

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.

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

Page 22 GAO/NSIAD-99-66 Future Years Defense Program

Appendix II Major Contributors to This Report Appendi x I I

National Security and International Affairs Division, Washington,
D. C.

Barry W. Holman, Associate Director Marilyn K. Wasleski, Assistant
Director David B. Best, Senior Evaluator

Chicago Field Office Neal H. Gottlieb, Evaluator- in- Charge

(709379)

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