Defense Outsourcing: Challenges Facing DOD As It Attempts to Save
Billions in Infrastructure Costs (Testimony, 03/12/97,
GAO/T-NSIAD-97-110).

GAO discussed the Department of Defense's (DOD) goal to save billions of
dollars by outsourcing work to the private sector and through other
initiatives for activities which DOD generally refers to as its support
infrastructure, focusing on: (1) DOD's past experience in achieving
infrastructure savings; (2) key infrastructure areas that offer the
greatest potential for savings; and (3) challenges DOD faces in reaching
goals to reduce infrastructure in the future.

GAO noted that: (1) GAO agrees with DOD and others that significant
opportunities exist to reduce DOD's infrastructure and support costs;
(2) however, GAO questions whether the magnitude of savings anticipated
by DOD and others is attainable within the current strategy and force
structure; (3) GAO's past and ongoing work shows that while DOD's past
savings initiatives yielded significant savings, they often fell short
of the initial goal; (4) while DOD has substantially reduced its
infrastructure through the base realignment and closure process and
significant savings will ultimately be achieved, savings will not be as
great as initially estimated or achieved as quickly as initially hoped;
(5) today's future years defense plan shows that, despite these
initiatives, future infrastructure costs will only slightly decline as a
relative percentage of DOD's budget; (6) because of GAO's concern about
the waste and inefficiencies in DOD's support structure and operations,
GAO has designated DOD's infrastructure as one of 24 high-risk areas
that are vulnerable to waste and mismanagement within the federal
government; (7) GAO believes that DOD could reap significant savings by:
(a) reducing excess capacity in its testing and evaluation areas and its
laboratories and centers; (b) reducing excess capacity within DOD's
depot maintenance system; (c) reducing the costs of managing its
$67-billion inventory, of which almost half is beyond war reserve and
operating requirements; (d) reducing installation support costs; and (e)
reducing training costs; (8) new ideas about reducing infrastructure
costs have recently been proposed to DOD that focus largely on
outsourcing and privatization to achieve savings; (9) GAO's analysis of
such proposals shows that there is reason for caution about whether the
magnitude of hoped for savings can be achieved; (10) there are also
various legislative requirements that will restrict and otherwise affect
DOD's ability to implement some proposed initiatives; (11) GAO thinks
that DOD's effort to reduce costs and achieve savings is extremely
important and encourages DOD to move forward as quickly as possible;
(12) breaking down cultural resistance to change, overcoming service
parochialism, and setting forth a clear framework for a reduced defense
initiative are key to effectively implementing savings; and (13) DOD and
the services need to give greater structure to their efforts by develop*

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

 REPORTNUM:  T-NSIAD-97-110
     TITLE:  Defense Outsourcing: Challenges Facing DOD As It Attempts 
             to Save Billions in Infrastructure Costs
      DATE:  03/12/97
   SUBJECT:  Military downsizing
             Defense cost control
             Defense procurement
             Strategic planning
             Military facilities
             Privatization
             Defense budgets
             Reengineering (management)
IDENTIFIER:  DOD Defense Management Review
             National Performance Review
             DOD Bottom-Up Review
             DOD Corporate Information Management Initiative
             GAO High Risk Program
             DOD Future Years Defense Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Readiness, Committee on National Security,
House of Representatives

For Release on Delivery
Expected at
2:00 p.m., EDT
Wednesday,
March 12, 1997

DEFENSE OUTSOURCING - CHALLENGES
FACING DOD AS IT ATTEMPTS TO SAVE
BILLIONS IN INFRASTRUCTURE COSTS

Statement of David R.  Warren, Director, Defense Management Issues,
National Security and International Affairs Division

GAO/T-NSIAD-97-110

GAO/NSIAD-97-110T

Defense Contractor

(709217)


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

  BRAC - Base Realignment and Closure
  CORM - Commission on Roles and Missions
  DMR - Defense Management Review
  DOD - Department of Defense
  DSB - Defense Science Board
  FYDP - Future Years Defense Spending
  OMB - Office and Management and Budget
  O&M - Operation and Maintenance

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee

I am pleased to be here today to present our observations, based on
past and ongoing work, on the Department of Defense's (DOD) goal to
save billions of dollars by outsourcing work to the private sector
and through other initiatives.  For fiscal year 1997, DOD estimates
that about $146 billion, or almost two thirds of its budget, will be
for operations and support activities.  These activities, which DOD
generally refers to as its support infrastructure, include
maintaining installation facilities, providing nonunit training to
the force, providing health care to military personnel and their
families, repairing equipment, and buying and managing spare parts
inventories.  As you requested, I will discuss DOD's past experience
in achieving infrastructure savings, key infrastructure areas that
offer the greatest potential for savings, and challenges DOD faces in
reaching goals to reduce infrastructure in the future. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

DOD defines infrastructure as activities that generally operate from
fixed locations to support missions like those carried out by combat
forces.  Infrastructure includes installation support; central
training; central medical; central logistics; force management;
acquisition; infrastructure; central personnel; and central command,
control, and communications.  DOD recognizes that its support
structure is inefficient and that its costs continue to absorb a
large share of the defense budget and diverts funding that could be
used for modernization. 

DOD has implemented various reform initiatives in the past to achieve
efficiencies and reduce costs.  The Defense Management Review (DMR),
base realignment and closure (BRAC) process, National Performance
Review, the bottom-up review, and other efforts proposed various
actions intended to achieve these objectives.  More recently, the
Commission on Roles and Missions (CORM) and the Defense Science Board
(DSB) have identified similar problems with DOD's support structure
and processes, but have made outsourcing and privatization the
centerpiece of their reforms to reduce infrastructure and support
costs.  DOD defines outsourcing as the transfer of functions
performed inhouse to outside providers and privatization as the
transfer or sale of government assets to the private sector. 

Between fiscal year 1997 and 2002, DOD plans to increase procurement
funding from $44.1 billion to $68.3 billion, primarily to buy new
weapon systems and upgrade existing systems.  DOD hopes that
initiatives to reduce infrastructure costs will provide much of the
increased procurement funding.  Initiatives to achieve infrastructure
and support savings include outsourcing and privatization,
acquisition reforms, organizational streamlining and consolidation,
management process reengineering, base and facility closures,
personnel reductions, and inventory reductions.  DOD's quadrennial
review is likely to identify additional plans and initiatives for
reducing infrastructure costs.  If savings from these initiatives are
not achieved and the defense budget remains relatively constant,
planned weapon systems procurements may have to be delayed, stretched
out, or canceled; the force structure may have to be further reduced;
and/or compromises may have to be made in military readiness. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:2

Before providing the details of my statement, I would like to briefly
summarize the key points.  First, we fully agree with DOD and others
such as the CORM and the DSB, that significant opportunities exist to
reduce DOD's infrastructure and support costs.  We also agree that
many of the initiatives that have been proposed relating to
outsourcing represent real opportunities for helping to achieve these
savings.  However, we question whether the magnitude of savings
anticipated by DOD and others is attainable within the current
strategy and force structure.  To the extent that these savings are
not achieved, DOD and the Congress may have to deal with difficult
decisions about how to fund the needed modernization of weapon
systems and other DOD priorities. 

Specifically, our past and ongoing work relative to DOD's savings
initiatives shows that while past savings initiatives yielded
significant savings, they often fall short of DOD's initial goal. 
For example, the DMR initiatives did not achieve the level of savings
that were originally estimated and many of the initiatives proposed
were not accomplished.  For example, although DOD-wide efforts to
standardize and consolidate automatic data processing systems under
the Corporate Information Management initiatives estimated savings of
$2.18 billion during 1991 through 1995, these savings were never
realized and the program has largely been abandoned.  Likewise, most
of the $5.6 billion savings projected for consolidation initiatives
have not materialized.  Further, while DOD has substantially reduced
its infrastructure through the BRAC process and significant savings
will ultimately be achieved, savings will not be as great as
initially estimated or achieved as quickly as initially hoped.  Also,
efforts to outsource various commercial activities under Office of
Management and Budget (OMB) Circular A-76, yielded some savings, but
again the savings were often less than anticipated.  In the final
analysis, today's future years defense plan shows that, despite these
initiatives, future infrastructure costs will only slightly decline
as a relative percentage of DOD's budget. 

Because of our concern about the waste and inefficiencies in DOD's
support structure and operations, we have designated DOD's
infrastructure as 1 of 24 high-risk areas that is vulnerable to waste
and mismanagement within the federal government.  We believe that DOD
could reap significant savings by:  (1) reducing excess capacity in
its testing and evaluation areas and reducing the 35-percent excess
capacity in DOD's laboratories and centers; (2) reducing the
50-percent excess capacity within DOD's depot maintenance system; (3)
reducing the costs of managing its $67 billion inventory, of which
almost half is beyond war reserve and operating requirements, by
aggressively adopting leading edge best practices; (4) reducing
installation support costs by relying more on interservice-type
arrangements and outsourcing more base support activities; and
finally by (5) reducing training costs by eliminating excess capacity
within its training facilities. 

New ideas about reducing infrastructure costs have recently been
proposed to DOD that focus largely on outsourcing and privatization
to achieve savings.  Our analysis of CORM, DSB, and OMB Circular A-76
proposals shows that, just as with past initiatives, there is reason
for caution about whether the magnitude of hoped for savings can be
achieved.  Further, the CORM's savings estimates are based primarily
on reported savings from public-private competitions under OMB
Circular A-76.  However, as noted in our work and work done by
others, the projected savings from these competitions were not as
high as expected.  Similarly, the DSB savings projections may be
overly optimistic because while they indicate that competition will
result in reduced costs, a highly competitive market does not exist
in some of the areas being proposed.  Lastly, there are various
legislative requirements that will also restrict and otherwise affect
DOD's ability to implement some proposed initiatives.  For example,
legislation prohibits the outsourcing of certain functions, such as
civilian firefighters or security guards at military installations. 
Also, there are other provisions that affect the extent to which
outsourcing can be accomplished in other areas. 

In conclusion, the opportunities for savings are great.  However,
from what we have seen historically and from our analysis of current
initiatives, it is questionable whether the magnitude of hoped for
savings will be achieved.  Notwithstanding this, we think DOD's
effort to reduce costs and achieve savings is extremely important and
we encourage DOD to move forward as quickly as possible.  As we
stated in our high-risk infrastructure report, breaking down cultural
resistance to change, overcoming service parochialism, and setting
forth a clear framework for a reduced defense infrastructure are key
to effectively implementing savings.  To do this, the Secretary of
Defense and the service secretaries need to give greater structure to
their efforts by developing an overall strategic plan.  The plan
needs to establish time frames and identify organizations and
personnel responsible for accomplishing fiscal and operational goals. 
DOD needs to present this plan to the Congress in much the same way
it presented its plan for force structure reductions in the Base
Force Plan and the bottom-up review.  This will provide a basis for
the Congress to oversee DOD's plan for infrastructure reductions and
will allow the affected parties to see what is going to happen and
when. 


   DOD INITIATIVES HAVE ACHIEVED
   LESS SAVINGS THAN PROJECTED
---------------------------------------------------------- Chapter 0:3

DOD has initiated several efforts to improve the efficiency and
reduce the costs of its support structure since 1990.  While DOD has
achieved some success, it has not reaped the level of savings
expected.  Our prior work on several of DOD's major initiatives such
as the DMR, the BRAC process, and personnel downsizing illustrates
this point and raises some issues the Congress should be aware of as
it reviews DOD's current and anticipated infrastructure and support
cost reduction initiatives.  Despite its initiatives over the past 10
years, DOD's infrastructure and support costs remain about the same,
in relative terms, as they were when these initiatives started.  In
recent testimony before your Committee, one senior Air Force officer
noted: 

     "Our infrastructure was reduced by less than 21 percent after
     four BRAC rounds, while the force structure fell by 40 percent. 
     This disparity has introduced organizational inefficiencies that
     drive up O&M costs, making it more difficult for us to give the
     taxpayers best value for the dollars that we invest in national
     security .  .  .  .  Funding for military construction and real
     property maintenance by contract has been cut to the bone, and
     perhaps beyond.  We are being pressed hard to find the resources
     to maintain our mission essential facilities."

Our work has shown that several factors have limited DOD's success in
implementing prior initiatives and achieving the expected savings. 
DOD officials have repeatedly recognized the importance of using
resources for the highest priority operational and investment needs
rather than maintaining unneeded property, facilities, and overhead. 
However, DOD has found infrastructure reductions to be difficult and
painful because they require up-front investments, the closure of
installations, and the elimination of military and civilian jobs. 
Service parochialism, a cultural resistance to change, and
congressional and public concern about the economic effects on local
communities, as well as the fairness of closure decisions, have
historically hindered DOD's ability to close or realign bases.  DOD
has also recognized that streamlining and reengineering its business
practices could result in savings, but it has made limited progress
in doing so.  Many opportunities exist for consolidating and
streamlining the services support functions and activities. 
Unfortunately, DOD has eliminated people and reduced funding without
ensuring that the initiatives have achieved the intended
efficiencies.  In some cases people were reduced without redesigning
the function or activity to reduce the staffing needs.  While DOD
gained some efficiencies through this approach it could have done
better by thoroughly and thoughtfully analyzing what work had to be
done and where and by whom the work could most cost-effectively be
done. 


      DMR SAVINGS ARE LESS THAN
      PROJECTED
-------------------------------------------------------- Chapter 0:3.1

The 1989 DMR proposed a program of consolidations and management
improvements estimated to save tens of billions of dollars in support
and overhead programs and eliminate an estimated 42,900 civilian and
military positions over fiscal years 1991-95.  The review resulted in
250 decisions to implement consolidations, improve information
systems, enhance management, and employ better business practices. 
The projected savings from each decision ranged from a few million
dollars to over $10 billion.  Early in the program, DOD made several
adjustments that included reducing savings projections, extending the
savings period for 2 years, and identifying additional savings
associated with new initiatives.  As a result, in April 1992, DOD
projected DMR savings to be $71.1 billion for fiscal years 1991-97
(Air Force, $22.5 billion; Navy, $21.6 billion; Army, $20.9 billion;
and DOD agencies, $6.1 billion).  In early 1993, DOD Comptroller
officials estimated that changes to the future years defense program
(FYDP), force reductions, and workload reductions could result in
total savings of about $62.8 billion rather than $71.1 billion.  The
savings reductions, however, could not be tracked to specific DMR
initiatives. 

In reviewing initial savings estimates, we found that the estimates
were not always based on cost analyses supported by historical facts
or empirical cost data.\1 During our 1993 review of the DMR we found
it difficult to validate and track savings to specific initiatives.\2
Moreover, we could not easily determine the extent to which savings
resulted from the initiatives or from other factors such as reduced
workloads, changes in force structure, or defense downsizing.  For
example, one initiative claimed savings of $5.6 billion for the
possible consolidation of supply depots, inventory control points,
maintenance depots, automatic data processing design centers and
operations, accounting operations and finance centers, and research
and development laboratories and test facilities.  However, most of
these consolidations did not occur.  Likewise, an initiative to
develop standard and consolidated automated data processing systems
throughout DOD was not accomplished.  Finally, a DSB task force known
as the Odeen panel evaluated the DMR savings projections and
concluded there could be a $12.6-billion to $16.7-billion shortfall
between the DOD's 1992 budget projections for fiscal years 1994-97. 
The panel also projected additional potential budget shortfalls of
$7.4 billion to $9.8 billion in fiscal years 1998 and 1999.  Overall,
it projected an estimated shortfall for the 1994-99 FYDP could be
between $20 billion and $26.5 billion and that a shortfall existed in
operation and maintenance (O&M) funding.  We reported in 1994 that
the panel's estimated budget shortfall was generally low.\3


--------------------
\1 Acquisition Reform:  Defense Management Report Savings Initiatives
(GAO/NSIAD-91-11, Dec.  4, 1990). 

\2 Defense Management Review (NSIAD-94-17R, Oct.  7,1993). 

\3 DOD Budget:  Evaluation of Defense Science Board Report on Funding
Shortfalls (GAO/NSIAD-94-139, Apr.  20, 1994). 


      BRAC SAVINGS ARE LESS THAN
      PROJECTED
-------------------------------------------------------- Chapter 0:3.2

Through the BRAC process initiated in 1988, DOD has closed or is
closing
97 domestic bases.  About 50 percent of the planned closures have
been completed.  DOD reported that last year, for the first time, the
savings from closures exceeded the costs and savings from closures
will continue to accumulate each year. 

DOD expected its base closures to reduce annual base support costs
from $41 billion in 1988 to $29.5 billion in 1997.  Our analysis of
base support costs in the FYDP and at nine closing installations
indicates that BRAC savings should be substantial.\4 However, the
total amount of actual savings is uncertain because DOD's systems do
not provide this information.  If DOD BRAC savings are less than
estimated, DOD's ability to fund future programs at planned levels
will be affected. 

DOD has submitted annual BRAC cost and savings estimates, but their
usefulness is limited.  For example, the Air Force's savings were not
based on budget-quality data, and the Army's estimates excluded
reduced military personnel costs that the Navy and the Air Force
included in their estimates.  Further, BRAC cost estimates excluded
more than $781 million in economic assistance to local communities as
well as other costs.  Consequently, the Congress does not have a
complete picture of projected BRAC savings. 


--------------------
\4 Military Bases:  Closure and Realignment Savings Are Significant,
but Not Easily Quantified (GAO/NSIAD-96-67, Apr.  8, 1996). 


      OUTSOURCING USING OMB
      CIRCULAR A-76 PROCEDURES
-------------------------------------------------------- Chapter 0:3.3

For the past three decades, federal agencies have been encouraged to
expand their procurements of goods and services from the private
sector.  For years, DOD has been contracting out functions,
activities, and services it formerly accomplished using DOD civilian
or military personnel.  OMB established procedures for determining
whether commercial activities should be outsourced in Circular A-76. 
These procedures, which have been the primary vehicle used to make
these outsourcing decisions, include a handbook for performing
cost-effectiveness evaluations.  However, these procedures and
various provisions of legislation have, to some extent, limited DOD
outsourcing and resulting savings. 

Using the A-76 process and procedures, DOD has conducted over 2,100
public-private competitions between 1978 and 1994.\5 However,
starting in 1988, the number of A-76 studies undertaken each year
began to decline substantially.  Several legislative provisions
limited DOD's outsourcing efforts.  For example, the first provision,
contained in the National Defense Authorization Act for fiscal years
1988-89 (P.L.  100-180), gave authority to installation commanders to
determine whether to study activities for potential outsourcing. 
Because of disruptions to their workforce, the cost of conducting
studies, and a desire for more direct control of their workforce,
various officials told us that commanders often chose not to pursue
outsourcing.  This law, which was known as the "Nichols Amendment"
and codified at 10 U.S.C.  2468, was effective through September 30,
1995.  Another provision, contained in the DOD Appropriations Act for
Fiscal Year 1991 (P.L.  101-511) and subsequent DOD appropriations
acts, prohibited funding for lengthy A-76 studies.  Finally, a
provision contained in the Department of Defense Authorization Acts
for Fiscal Years 1993 and 1994 prohibited DOD from entering into
contracts resulting from cost studies done under OMB Circular A-76. 
In response, DOD imposed a moratorium on A-76 studies and canceled
about three-quarters of the ongoing studies.  The prohibition expired
on April 1, 1994, and DOD subsequently lifted the moratorium.  These
provisions, along with the Nichols Amendment, had the effect of
limiting outsourcing in most of the services until 1996.  In 1996,
OMB revised its supplemental handbook in an effort to streamline and
improve the outsourcing process. 

Fundamental to determining whether or not to outsource is the
identification of core functions and activities that DOD should
continue to do.  OMB Circular A-76 characterizes core as those
activities that are "inherently governmental." Under 10 U.S.C.  2464,
the Secretary of Defense is required to define DOD's core functions,
which are not to be contracted out.  DOD has proposed a risk
assessment process to be used in identifying core depot maintenance
requirements and each of the services is in the process of
determining its core requirements using its own procedures.  DOD has
not defined a core process or identified core requirements for other
logistics functions.  It is not clear how the process will be used as
DOD increases outsourcing using OMB Circular A-76 and other
procedures. 

The A-76 competitions done through 1994 mostly involved low-skilled
work such as commissary operations, family housing and grounds
maintenance, administrative and custodial services, and food and
guard service.  These activities generally involved low capital
investment, unskilled labor, and could be defined by relatively
simple and straight- forward requirements statements.  The
competitions generally elicited vigorous competition.  About 50
percent of the 2,100 competitions were won by the public sector. 


--------------------
\5 DOD maintains a database of those commercial activities that have
undergone an A-76 study and the projected savings that were estimated
for each. 


         CONCERNS ABOUT PROJECTED
         SAVINGS FROM A-76 STUDIES
------------------------------------------------------ Chapter 0:3.3.1

For various reasons, we are concerned that projected savings of 20 to
40 percent reported from prior A-76 competitions are not reliable. 
For example, our 1990 evaluation of DOD savings data showed that
neither DOD nor OMB had reliable data on which to assess the
soundness of savings estimates.  Also, DOD and OMB did not know the
extent to which expected savings were realized because DOD did not
routinely collect and analyze cost information to track savings after
a cost study had been done.\6 Further, we have reported that (1)
savings estimates represent projected, rather than realized savings;
(2) the costs of the competitions were not included; (3) baseline
cost estimates are lost over time; (4) actual savings have not been
tracked; (5) where audited, projected savings have not been achieved;
and (6) in some cases, work contracted out was more expensive than
estimated before privatization.\7

One commercial activity--depot maintenance--has in most cases been
exempted from the A-76 process by 10 U.S.C.  2469.  However, DOD
implemented a similar program for depot maintenance activities
beginning in 1985, when the Congress authorized in the DOD
Appropriations Act for Fiscal Year 1985 (P.L.  98-473), a test
program to allow public and private shipyards to compete for the
overhaul of selected ships on the basis of cost comparisons.  The
program was later expanded to cover Naval aviation, Air Force, and
Army depot maintenance.  In 1994, DOD terminated its public-private
competition program for depot maintenance.  We reported that the
program had resulted in savings, although these savings were
difficult to quantify, and the program should be reinstated.\8 The
statement of managers in the conference report on the DOD
Appropriations Act for Fiscal Year 1995 provided for the
reinstitution of the program, which was accomplished in 1996.\9


--------------------
\6 OMB Circular A-76:  DOD's Reported Savings Figures Are Incomplete
and Inaccurate (GAO/GGD-90-58, Mar.  15, 1990). 

\7 Defense Depot Maintenance:  Commission on Roles and Mission's
Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
15, 1996). 

\8 Navy Maintenance:  Assessment of the Public-Private Competition
Program for Depot Maintenance (GAO/NSIAD-96-30, Jan.  22, 1996);
Depot Maintenance:  Opportunities to Privatize Repair of Military
Engines (GAO/NSIAD-96-33, Mar.  5, 1996); and Closing Maintenance
Depots:  Savings, Workload, and Redistribution Issues
(GAO/NSIAD-96-29, Mar.  4, 1996). 

\9 H.R.  CONF.  REP.  NO.  103-747. 


      LARGE PERSONNEL REDUCTIONS
      HAVE NOT RESULTED IN
      COMMENSURATE OPERATIONS AND
      MAINTENANCE BUDGET
      REDUCTIONS
-------------------------------------------------------- Chapter 0:3.4

Since about 40 percent of the O&M budget funds civilian salaries, DOD
expects that initiatives to reduce civilian personnel will result in
substantial O&M budget reductions.  Between 1990 and 1997, DOD has
reduced its civilian workforce by 275,000 people--or about 26
percent.  Over the same period, the number of active duty service
members were reduced by 29 percent and defense-related private sector
employees were reduced by 34 percent.  Table 1 shows personnel
reductions for selected civilian occupational categories. 
Secretaries and depot maintenance personnel took the largest
percentage reduction, at 52 percent and 48 percent, respectively,
while educators were reduced by only 5 percent and scientists by 6
percent.  Fire and police personnel were reduced by 17 percent and
installation maintenance by 20 percent. 



                                     Table 1
                     
                      Changes In Personnel Strengths for DOD
                        and Defense-Related Private Sector
                                    Employees

                              (Numbers in thousands)

                                                                   Reductions in
Personnel                FY 1990         FY 1997       Reduction         percent
----------------  --------------  --------------  --------------  --------------
Active duty                2,143           1,521             622              29
 military
DOD civilian               1,073             798             275              26
================================================================================
Total                      3,216           2,319             897              28
Defense-related            3,150           2,080           1,070              34
 private sector
 employees

Selected occupational categories of DOD civilians
--------------------------------------------------------------------------------
DOD depot                    147              76              71              48
 maintenance
 employees
Scientists                    16              15               1               6
Data systems                  37              25              12              32
 managers
Installation                  10               8               2              20
 maintenance
Legal                          3               3               0               0
Medical                       10               9               1              10
 technicians
Personnel                     19              15               4              21
 services
Secretarial                   69              33              36              52
Fire and police               18              15               3              17
Educators                     20              19               1               5
--------------------------------------------------------------------------------
During our review of outsourcing base support operations, various
installation commanders told us that one way of achieving
across-the-board personnel reductions mandated by the Office of the
Secretary of Defense is to outsource, which would free remaining
civilian authorizations for use in other activities.  One senior
command official in the Army stated that the need to reduce civilian
positions is greater than the need to save money.  This view was
reinforced by the DOD Inspector General's 1995 report on cost growth,
which noted that "the goal of downsizing the Federal workforce is
widely perceived as placing DOD in a position of having to contract
for services regardless of what is more desirable and cost
effective."

Despite a reduction of 275,000 civilian personnel since 1990, and
plans for further substantial reduction over the next several years,
our analysis of the 1997-2001 FYDP shows that infrastructure costs
are expected to increase.  In May 1996, we reported that the
infrastructure portion of the 1997 FYDP is projected to increase
about $9 billion, from $146 billion in 1997 to $155 billion in 2001
(see table 2).\10 Despite this increase, the infrastructure costs as
a proportion of the total budget, is projected to decrease slightly
from about 60 percent in 1997 to about 57 percent in 2001.  The
decrease results primarily because DOD's total budget is projected to
increase at a faster rate than the infrastructure part of the
budget.\11



                                Table 2
                
                 DOD'S Projected Funding Through Fiscal
                               Year 2001

                         (Dollars in billions)

                                                         Percentage of
                                                           budget that
                                   Total  Infrastructur             is
                               projected      e part of  infrastructur
Fiscal year                       budget         budget              e
-------------------------  -------------  -------------  -------------
1997                                $244           $146             60
1998                                 249            145             58
1999                                 255            148             58
2000                                 263            150             57
2001                                 270            155             57
----------------------------------------------------------------------
Source:  GAO analysis of DOD's 1997-2001 FYDP. 

The installation support portion of DOD's infrastructure budget is
projected to decline during the 1997 to 2001 period, in part, due to
savings generated from the BRAC process.  However, other
infrastructure categories, including acquisition infrastructure;
force management; central logistics; central medical; central
training; central personnel; and central command, control, and
communications are projected to increase, although individual
accounts within these areas, such as military construction and real
property maintenance, are declining.  The combination of O&M and
military personnel appropriations fund about 80 percent of
infrastructure activities that can be clearly identified in the FYDP. 
Thus, DOD must look to these appropriations if it intends to spend
less for infrastructure activities. 



--------------------
\10 Defense Infrastructure:  Budget Estimates for 1996-2001 Offer
Little Savings for Modernization (GAO/NSIAD-96-131, Apr.  4, 1996). 

\11 Defense Infrastructure:  Costs Projected to Increase Between 1997
and 2001 (GAO/NSIAD-96-174, May 31, 1996). 


      SHORTFALLS IN OPERATION AND
      SUPPORT COST REDUCTIONS
      LIMIT PLANNED PROCUREMENT
      FUND INCREASES
-------------------------------------------------------- Chapter 0:3.5

Planned reductions in DOD's O&M costs have not achieved expected
decreases in the O&M budget.  For example, as illustrated in figure
1, although the fiscal year 1995 FYDP projected that O&M funding
would be about $88 billion in fiscal year 1997, the 1997 FYDP
estimated that O&M expenditures for fiscal year 1997 would be $1.2
billion more than projected 2 years earlier.  Moreover, the most
recent 1998 FYDP estimate shows that about $92.9 billion will be
required to support operations funded by the O&M account during
1997--$5 billion more than projected by the 1995 FYDP. 

   Figure 1:  Operation and
   Maintenance Spending Estimates
   for Fiscal Years 1997-99

   (See figure in printed
   edition.)

Conversely, as shown in figure 2, the procurement account had to be
reduced over that same period to offset increases in O&M cost.  Thus,
planned DOD increases in procurement funding had to be put aside
because of the realities of funding day-to-day operational support
costs.  For example, the 1995 FYDP projected that DOD would spend
$49.8 billion for procurement in fiscal year 1997.  However, DOD
actually budgeted only $38.9 billion for procurement--over $10
billion less than projected 2 years earlier.  Although the 1998 FYDP
indicates that an additional $5.2 billion was spent for Procurement
during 1997 than was budgeted the previous year, the $44.1 billion
expenditure was still $5.7 less than had been projected in 1995 to be
spent for procurement in 1997. 

   Figure 2:  Procurement Spending
   Estimates for Fiscal Years
   1997-99

   (See figure in printed
   edition.)


   OPPORTUNITIES FOR ACHIEVING
   FUTURE INFRASTRUCTURE SAVINGS
---------------------------------------------------------- Chapter 0:4

As we recently reported, despite DOD's initiatives, it is critical
for DOD to further reduce infrastructure and support costs.\12 After
10 years of effort, billions of dollars are still being wasted
annually on inefficient and unneeded activities.  For fiscal year
1997, DOD estimates that about $146 billion, or almost two-thirds of
its budget, will be for operation and support activities.  These
activities, which DOD generally refers to as support infrastructure,
include research, development, and procurement of major weapon
systems; buying and managing spare parts and repairing equipment;
maintaining installation facilities; providing non-unit training to
the force; and providing health care to military personnel and their
families.  Significant excess capacity exists in these activities. 
While there are many opportunities to reduce this excess capacity and
improve the cost-effectiveness of DOD support operations, DOD faces
many challenges in doing so.  I will briefly highlight some of the
key areas where costly excess capacity and infrastructure remain and
have the greatest potential for savings--particularly through
reengineering and consolidating functions and activities among the
services. 

  -- Acquisition infrastructure, which includes activities and
     personnel that support the research, production, and procurement
     of weapon systems and other critical defense items, accounts for
     about $10.2 billion.  We have noted problems in achieving
     consolidations in testing and evaluation areas and stated that
     DOD should consider consolidations in two areas--Air Force and
     Navy electronic warfare threat testing capabilities and high
     performance fixed-wing aircraft testing capabilities.  No major
     consolidations or reductions have occurred.  Likewise, although
     DOD's laboratories and logistics centers have excess capacity of
     about 35 percent, prior reform initiatives have generally
     focused on management efficiencies rather than infrastructure
     reductions. 

  -- Central logistics, which includes maintenance activities, the
     management of materials, operation of supply systems,
     communications, and minor construction, accounts for as much as
     $51 billion, including funding from the military revolving
     funds.  We have identified long-standing problems and
     opportunities to reduce infrastructure costs in the key area of
     inventory management.  While the Defense Logistics Agency has
     taken steps to reengineer its logistics practices and reduce
     consumable inventories, it could do more to achieve substantial
     savings.  Further, although DOD has made progress in reducing
     the value of its secondary inventory, in part by adopting
     leading edge practices, including use of prime vendor delivery,
     our analysis of inventory valued at $67 billion showed that
     $41.2 billion of the inventory was not needed.  About $14.6
     billion of the unneeded inventory did not have projected demands
     and will likely not ever be used.\13 Additionally, DOD is
     currently reassessing the issue of streamlining and
     consolidating the management of the inventory control points,
     which are responsible for material management.  We have also
     reported that BRAC recommendations for depot maintenance
     closures during the 1995 round did little to eliminate excess
     capacity and that excess capacity in the depot system remains at
     about 50 percent, with the Air Force and the Army having the
     greatest problems in this area. 

  -- Installation support, which includes personnel and activities
     that fund, equip, and maintain facilities from which defense
     forces operate, will consume about $30 billion, or about 17
     percent of the projected fiscal year 1997 infrastructure
     expenditures.  The central issue is that after four BRAC rounds,
     the services have reduced their facilities infrastructure at a
     much smaller rate than their force structure.  Despite the
     recognized potential to reduce base operating support costs
     through greater reliance on interservice-type arrangements, the
     services have not taken sufficient advantage of available
     opportunities.  Differing service traditions and cultures and
     concern over losing direct control of support assets have often
     caused commanders to resist interservicing.  Additionally, by
     having too much infrastructure to support, available military
     construction and repair dollars are thinly spread. 

  -- Central training infrastructure, which includes basic training
     for new personnel, aviation and flight training, military
     academies, officer training corps, other college commissioning
     programs, and officer and enlisted training schools, will
     account for about $19 billion, or 13 percent of projected 1997
     infrastructure expenditures.  We have identified several
     training-related installations with relatively low military
     value that were not proposed for closure, despite the long-term
     savings potential.  We have also pointed out interservicing
     opportunities that remain. 

  -- Central medical, which includes personnel and funding for
     medical care provided to military personnel, dependents, and
     retirees, will account for about $16 billion of the projected
     1997 infrastructure expenditures.  Activities include medical
     training, management of the military health care system, and
     support of medical installations.  Each of the military
     departments operates its own health care system, even though
     these systems have many of the same administrative, management,
     and operational functions.  Since 1949, over 22 studies have
     reviewed the feasibility of creating a health care entity within
     DOD to centralize management and administration of the three
     systems--most of them encouraging some form of organizational
     consolidation. 


--------------------
\12 High-Risk Series:  Defense Infrastructure (GAO/HR-97-7, Feb. 
1997). 

\13 Defense Logistics:  Much of the Inventory Exceeds Current Needs
(GAO/NSIAD-97-71, Feb.  28, 1997). 


   CHALLENGES DOD FACES AS IT
   IMPLEMENTS AND CONSIDERS
   PROPOSALS TO ACHIEVE
   INFRASTRUCTURE SAVINGS
---------------------------------------------------------- Chapter 0:5

Over the last several years, DOD has renewed its efforts to achieve
infrastructure savings through the use of the A-76 process.  At the
same time, studies provided by the CORM and DSB over the last 2 years
have provided increasingly aggressive outsourcing proposals and
predictions of significant savings.  Key elements of the DOD effort
and the two studies are: 

  -- DOD anticipates that by 2003 it can achieve over $2 billion
     savings annually from outsourcing activities that involve about
     130,000 civilian personnel.  Further, DOD has reportedly
     programmed the savings into its fiscal year 1998 FYDP. 

  -- The CORM report issued in May 1995 recommended that DOD
     outsource or privatize all current and newly established
     commercial-type support services.  The report estimated that
     taking this action could save over $3 billion a year. 

  -- The DSB report issued in November 1996 recommended dramatic
     restructuring of DOD's support structure by maximizing the use
     of the private sector for almost all support functions.  From
     this and other proposed changes such as the use of better
     business practices, the DSB estimated over $30 billion dollars
     could be saved annually from defense infrastructure accounts by
     the year 2002. 

We agree that substantial savings can be achieved by outsourcing and
privatizing; consolidating similar functions to reduce excess
capacity; reengineering remaining functions, processes, and
organizations; more effectively using technology innovations; and
through other initiatives.\14 Our recent report on downsizing the
defense infrastructure provides
13 options that could result in savings of about $11.8 billion from
fiscal years 1997 to 2001.  However, based on the lessons learned
from past initiatives and principally our work on depot maintenance
and base support operations, we are concerned that savings of the
magnitude projected by DOD, the CORM, and the DSB may not be
achievable.  Last, as noted by DOD, the CORM, and DSB, a number of
legislative requirements restrict or affect implementation of these
proposals.  The extent to which these requirements change or remain
the same will also affect savings estimates. 


--------------------
\14 Defense Infrastructure:  Budget Estimates for 1996-2001 Offer
Little Savings for Modernization (GAO/NSIAD-96-131, Apr.4, 1996). 


      OUTSOURCING SAVINGS
      EXPECTATIONS MAY NOT BE
      ACHIEVABLE IN THE MAGNITUDE
      PROJECTED
-------------------------------------------------------- Chapter 0:5.1

In 1993, the National Performance Review endorsed outsourcing, noting
that DOD should implement a comprehensive program for outsourcing
non-core functions.  According to its report, Creating a Government
That Works Better & Costs Less, DOD had identified 50 broad area
candidates for outsourcing, such as base operations support, housing,
health services, maintenance and repair, training, labs, security,
and transportation.  The report noted that outsourcing should take
place when it makes economic and operational sense, based on
accomplishing the following steps: 

  -- clearly describe the function in objective terms of what gets
     done and how its gets done, but not who does it;

  -- categorize the function as either core or non-core;

  -- establish detailed, specific performance requirements for each
     function based on the commander/manager's mission and customer
     requirements;

  -- analyze legal, supplier, and performance requirements for each
     function to determine the source that best balances economic
     benefits with operational risks;

  -- produce a detailed performance agreement and associated
     documents for the function (e.g., performance work statement and
     request for proposals if the function is to be outsourced); and

  -- introduce cost competition. 

We recently reported that DOD is significantly increasing its
emphasis on outsourcing base operation support and other activities
through the A-76 process.\15 Our work shows that while opportunities
for savings exist, it is questionable whether they will be in the
magnitude currently being projected.  From October 1995 to January
1997, the services announced plans to begin studies during fiscal
years 1996 and 1997 that involve over 34,000 positions, most of which
were associated with base support activities.  Further studies
involving an additional 100,000 positions will be started over the
next 6 years.  We recognized that outsourcing is cost-effective
because the competitions generate savings--usually through a
reduction in personnel--whether the competition is won by the
government or the private sector.  However, we questioned some of the
services' savings projections. 

After a somewhat slow start in beginning to do A-76 cost studies
after reinstitution of the program within DOD, the services are now
expanding the A-76 program.  One of the reasons is that the services
had lost much of the expertise required to define the requirements
and conduct the cost evaluations during recent personnel downsizing. 
The Air Force, which has led the way in initiating new studies, plans
to study up to 60,000 positions for potential outsourcing from 1998
through 2003--the majority of which are in base support services. 
The Army plans to study about 11,000 mostly civilian positions in
fiscal year 1997 and another 5,000 from fiscal year 1998 to 2003. 
The Navy plans to begin studies of about 80,000 positions for
potential outsourcing over the next several years--about 50,000
civilians and 30,000 military.  Although the Marine Corps estimates
it will study about 5,000 positions, it does not have a firm
timetable for initiating or completing these studies. 

The Air Force projects a 20-percent cost savings of up to $1.26
billion initially from outsourcing mostly base support functions
between 1998 and 2003.  The Army projected a 10-percent savings but
recently increased its savings projection to 20 percent.  The Marine
Corps projects initial savings of about $10 million per year
beginning in 1998, increasing to $110 million per year by fiscal year
2004.  The Navy projects a 30-percent net cost savings. 

As previously discussed, we have concerns about whether the 20- to
30-percent savings assumed by the services will be achieved.  The
savings projections are based on unverified projections rather than
on actual A-76 savings, and where audited, the estimated savings did
not achieve the projections, even though the costs of the
competitions were not taken into consideration.  Additionally, we
recently found that many installation officials expressed concern
that personnel downsizing had already eliminated much of the
potential for outsourcing to achieve additional personnel savings. 
Also, potential outsourcing savings may be minimized by increases in
the scope of work done under outsourcing.  Such increases can occur,
when funding becomes available to restore a level of service that had
been previously reduced due to resource constraints, such as
maintenance and repair activities. 


--------------------
\15 Base Operations:  Challenges Confronting DOD as It Renews
Emphasis on Outsourcing (GAO/NSIAD-97-86, Mar.  11, 1997). 


      SAVINGS IN THE MAGNITUDE
      PROJECTED BY THE CORM ARE
      QUESTIONABLE
-------------------------------------------------------- Chapter 0:5.2

In its report, Directions for Defense (May 24,1995), the CORM
recommended that DOD outsource all current and newly established
commercial-type support services.  According to the report,
outsourcing candidates should range from routine commercial support
services widely available in the private sector to highly specialized
support of military weapons.  For example, janitorial companies might
perform facilities maintenance, replacing government custodians; and
commercial software engineering firms might upgrade computer programs
for sophisticated aircraft electronic countermeasures equipment,
replacing government software specialists.  CORM's report recommended
the following actions: 

  -- Outsource new support requirements, particularly the depot-level
     logistics support of new and future weapon systems. 

  -- OMB withdraw Circular A-76; the Congress repeal or amend
     legislative restrictions; and DOD extend to all commercial-type
     activities a policy of avoiding public-private competition where
     adequate private sector competition exists. 

  -- Move to a time-phased plan to privatize essentially all existing
     depot-level maintenance. 

  -- Outsource selected material management activities. 

  -- Increase access to and require enrollment in private sector
     medical care and require users of DOD care to enroll and DOD to
     set a fee structure and institute a medical allowance for active
     duty service members' families. 

  -- Outsource family housing, finance and accounting, data center
     operations, education and training, and base infrastructure. 

The report stated that its recommendations for greater use of private
market competition would lower DOD's support costs and improve
performance--noting that a 20-percent savings from outsourcing DOD's
commercial-type workload would free over $3 billion per year for
higher defense needs. 


         DOD'S RESPONSE
------------------------------------------------------ Chapter 0:5.2.1

In response to the CORM report, in 1995 the Deputy Secretary of
Defense established integrated policy teams to explore outsourcing
opportunities for base support, depot maintenance, material
management, education and training, finance and accounting, data
processing, and family housing.  The teams were expected to identify
potential outsourcing candidates, analyze obstacles to outsourcing,
and develop solutions to facilitate implementation.  In addition, the
Secretary established cross-functional teams to recommend changes to
OMB Circular A-76 and various legislative provisions that could
otherwise delay or impede implementation of newly identified
outsourcing initiatives. 

The material management team developed business case analyses for
outsourcing parts of the Defense Reutilization and Marketing Service
and Defense Logistics Agency storage and warehousing operations.  The
team also identified the Defense Logistics Agency and military
inventory control point cataloging function for possible outsourcing. 
The finance and accounting team identified several potential
outsourcing candidates, including claims management, defense
commissary bill paying, nonappropriated fund accounting, and payroll. 
One of the cross-functional teams developed a proposed legislative
package that called for the Congress to rescind all legislative and
administrative provisions constraining outsourcing.  This proposal
was not adopted.  While some outsourcing team meetings are still
being held, this effort could be consumed by DOD's current
quadrennial defense review, which is likely to identify outsourcing
as one of its key initiatives. 


         SAVINGS PROJECTIONS ARE
         NOT WELL SUPPORTED
------------------------------------------------------ Chapter 0:5.2.2

While recognizing the potential savings from outsourcing, we question
the savings projections cited by the CORM.  As we reported in July
1996, the CORM's data did not support its depot privatization savings
assumption.\16 Half of the competitions were won by the public
sector.  Further, assumptions were based primarily on reported
savings from public-private competitions for commercial activities
under OMB Circular A-76.  Many private sector firms generally made
offers for this work due to the highly competitive nature of the
private sector market for these activities, and estimated savings
were generally greater if there were a large number of competitors. 
We also noted that our work and defense audit agencies have reported
that projected savings were often not achieved or were less than
expected due to cost growth and other factors.  Further, the savings
resulted from competition rather than from privatization. 

Finally, we also noted that outsourcing in the absence of a highly
competitive market, would not likely achieve expected savings and
could increase the cost of depot maintenance operations.  Further,
our data shows that outsourcing risks are higher when privatizing
unique, highly diverse, and complex work where requirements are
difficult to define, large capital investments are required,
extensive technical data is involved, and highly skilled and trained
personnel are required.  CORM assumed that meaningful competition
would be generated for most of the work it recommended be privatized. 
Yet, for depot maintenance, 76 percent of the 240 depot maintenance
contracts we reviewed were awarded on a sole-source basis. 


--------------------
\16 Defense Depot Maintenance:  Commission on Roles and Mission's
Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
15, 1996). 


      DSB PROJECTED $30 BILLION
      SAVINGS ARE QUESTIONABLE
-------------------------------------------------------- Chapter 0:5.3

The final report of the DSB in November 1996, Achieving an Innovative
Support Structure for 21st Century Military Superiority, recommended
a dramatic restructuring of DOD's support structure by maximizing the
use of the private sector for almost all support functions.  The DSB
provided a new vision where DOD would only provide warfighting,
direct battlefield support, policy and decision-making, and
oversight.  All other activities would be done by the private
sector--using best practices for achieving better, faster, lower-cost
results.  The following are examples of changes that might result
from DSB's new vision: 

  -- Use the private sector for logistics and maintenance in the
     continental United States.  DOD would get out of the repair and
     inventory management business.  Expand contractor logistics
     support--the life-cycle support of weapon systems often by the
     original equipment manufacturers.  The report noted that relief
     from legislative constraints would be required, but that most
     contractor logistic support could be done without legislative
     changes.  DOD would make an investment of $300 million to $500
     million for reliability improvements. 

  -- Privatize-in-place testing and evaluation facilities. 

  -- Outsource automatic data processing business to four to six
     contractor-owned facilities. 

  -- Outsource most DOD finance and accounting service functions. 

  -- Use the private sector to manage DOD housing.  Raise allowances
     and use contractors to build and manage housing where no markets
     exist. 

  -- Privatize DOD commissaries. 

  -- Privatize all remaining special skills training. 

  -- Privatize all remaining base operating support functions. 

DSB's report also advocated revoking OMB Circular A-76.  In the
meantime, the report suggested avoiding it by recategorizing and
getting out of the business of performing various functions, an
approach the report noted the Defense Logistics Agency had
successfully employed when it transferred the pharmaceutical
warehousing and distribution functions to vendors.  According to the
report, if DOD implemented the specific recommendations of DSB, over
$30 billion could be reduced annually from defense infrastructure
accounts by the year 2002.  The report used a baseline of $140
billion for current annual DOD infrastructure costs.  These savings
were dependent on a reduction of about 5 percent per year in the
civilian workforce and about 2 percent per year of military personnel
over the next 5 years.  The report also recommended a series of base
realignment and closure reviews. 


         DSB SAVINGS ASSUMPTIONS
         ARE QUESTIONABLE
------------------------------------------------------ Chapter 0:5.3.1

We have not yet completed our analysis of the DSB report.  In
general, we agree that there are great opportunities for savings in
many of the areas they address.  Also, we share their concern that
too much excess capacity remains in many of DOD's infrastructure
activities.  We also believe that outsourcing and the use of leading
edge business practices, such as direct vendor delivery for
inventory, represent opportunities to reduce costs.  However, the
outsourcing savings projected by this study were based on essentially
the same assumptions as those used by the CORM, although the DSB
study expanded the functions and activities that it recommended for
outsourcing and claimed savings of up to 40 percent from
privatization.  Our analysis indicates that savings projections of
$30 billion are not likely to be achieved.  These savings assumptions
were not supported and were based on favorable conditions that may
not currently exist for a number of activities recommended for
outsourcing.  We have found that outsourcing savings are dependent on
or highly influenced by (1) the continual existence of a competitive
commercial market; (2) the ability to clearly define the tasks to be
done and measure performance; (3) the assumption that the private
sector can do the required work more cost-effectively than a
reengineered DOD activity; (4) the extent that commercial contracting
and contract management practices can be applied to the outsourced
activity; (5) the relative cost-effectiveness of the public activity
being outsourced; and (6) the ability to reduce the existing public
infrastructure and personnel costs associated with the outsourced
activity.  Further, the DSB savings projections may also include
functions and activities that are determined to be core. 

Another area of concern is that the DSB referred often to outsourcing
competitively, yet it recommended total contractor logistics support
for weapon systems--often a sole-source arrangement with the original
equipment manufacturer--which could include maintenance, supply,
systems management, and other functions for the life of the systems. 
We question whether this is the appropriate model for most weapon
systems and are concerned about its potential for cost growth and
long-term impact on core capabilities for several reasons: 

  -- First, while DOD managers have found contractor logistics
     support to be cost-effective for commercially derived systems
     with established competitive repair sources--these conditions
     are not present for military unique systems and cutting edge
     technologies. 

  -- Second, our past work demonstrates that most depot work is
     sole-sourced to the original equipment manufacturer, raising
     cost and future competition concerns.  DOD managers told us that
     steadily escalating prices are typical of sole-source contractor
     logistics support contracts. 

  -- Third, privatizing total support on new and future weapon
     systems can make it difficult for the organic depots to acquire
     and sustain technical competence on new systems, leading edge
     technologies, and critical repair processes necessary to
     maintain future core capabilities, provide a credible
     competitive repair source, and be a smart buyer for those
     logistics activities that will be contracted out. 

When competition--whether from the private sector or an organic
depot--is introduced, prices decline.  For example, the Air Force
identified $350 million in savings when it was able to recompete
contractor logistics support contracts and move the maintenance work
from the manufacturer to other commercial firms, including $50
million in savings on the KC-10 by awarding a competitive contract to
the firm previously subcontracted to the prime, thus cutting out the
"middle-man".  The Air Force is also achieving significant savings as
a result of interservicing the F404 engine to a Navy depot rather
than continuing to contract on a sole-source basis with the original
equipment manufacturer as the Air Force did for many years. 

Finally, while the DSB report seems to assume that outsourcing is the
most cost-effective option for all DOD support operations, this may
not be the case.  The reengineered public entity was determined to be
the most cost-effective for the over 2,100 competitions conducted
using A-76 procedures.  Further, our review of public-private depot
maintenance competitions indicated that the private sector frequently
offered the best value. 


      EFFECTS OF LEGISLATION ON
      OUTSOURCING
-------------------------------------------------------- Chapter 0:5.4

A number of legislation provisions may limit outsourcing.  For
example, section 2464 of title 10 provides that DOD activities should
maintain a logistics capability (personnel, equipment, and
facilities) sufficient to ensure technical competence and resources
necessary for an effective and timely response to a mobilization or
other national defense emergency.  It also requires the Secretary of
Defense to define logistics activities that are necessary to maintain
the logistics capability.  Those activities may not be contracted out
without a waiver by the Secretary.  DOD has proposed a risk
assessment process to be used in identifying core depot maintenance
requirements and each of the services is in the process of
determining its core requirements using the procedures each has
implemented to do so.  DOD has not defined a core process or
identified core requirements for other logistics functions.  It is
not clear how that process will be conducted as DOD increases
outsourcing using OMB Circular A-76 and other procedures.  Other
statutes affecting the privatization of depot maintenance are
discussed in our March 1996 report addressing opportunities for
privatizing repair of military engines.\17

Also, 10 U.S.C.  2461 requires A-76 cost comparisons, congressional
notification of studies involving more than 45 civilians, and annual
reports to the Congress on outsourcing.  Section 2465 of title 10
prohibits DOD from outsourcing civilian firefighters or security
guards at military installations.  DOD's fiscal year 1996 inventory
of civilian and military personnel performing commercial activities
shows that about 9,600 firefighters and 16,000 security guards are
exempt from outsourcing because of this law and other considerations,
such as mobility requirements.  Outsourcing is permitted only if the
positions were outsourced before September 24, 1983.  We plan to
assess this issue more thoroughly by comparing the cost of in-house
positions in selected instances where such services have been
outsourced. 


--------------------
\17 Depot Maintenance:  Opportunities to Privatize Repair of Military
Engines (GAO/NSIAD-96-33, Mar.  5,1996). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 0:6

In conclusion, we agree with DOD that its infrastructure costs can
and should be substantially reduced, and we believe that DOD should
identify key functions and activities where it should focus to
identify requirements--including core---and begin to reengineer those
activities and functional areas that appear to offer the best
opportunities for savings.  Outsourcing, when used correctly, has
been an effective tool in achieving cost reductions.  Our work
advocates expanded reliance on the private sector where that is the
most cost-effective solution.  However, evaluations must be made on
an individual basis, taking into consideration the costs and benefits
of each potential outsourcing opportunity. 

DOD already has programs to identify potential infrastructure
reductions in many areas.  However, breaking down cultural resistance
to change, overcoming service parochialism, making decisions to
eliminate cross functional stovepipes, and setting forth a clear
framework for a reduced defense infrastructure are key to avoiding
waste and inefficiency and generating the maximum savings from DOD's
infrastructure accounts.  To do this, the Secretary of Defense and
the service secretaries need to give greater structure to their
efforts by developing an overall strategic plan that establishes time
frames and identifies organizations and personnel responsible for
accomplishing fiscal and operational goals.  DOD needs to present
this plan to the Congress in much the same way that it presented its
plans for force structure reductions in the Base Force Plan and
bottom-up review.  The Congress can then oversee the plan and allow
the affected parties to see what is going to happen, and when.  In
developing the plan, DOD should consider using a variety of means to
achieve reductions, including consolidations, reengineering,
interservicing agreements, and outsourcing--with appropriate
personnel reductions implemented to take advantage of the
efficiencies generated by these initiatives.  It should also consider
the need and timing for future BRAC rounds, as suggested by the 1995
BRAC Commission and other groups. 


-------------------------------------------------------- Chapter 0:6.1

Mr.  Chairman, this concludes my prepared remarks.  I would be
pleased to answer questions at this time. 

*** End of document. ***