DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key
Reform Initiative (Letter Report, 02/22/99, GAO/NSIAD-99-46).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) use Office of Management and Budget Circular A-76 as a
means of realizing an estimated $6 billion savings in support costs
between fiscal years (FY) 1997 and 2003, focusing on: (1) identifying
the competition and savings goals; (2) assessing the accuracy of the
savings estimates provided to Congress; and (3) evaluating the adequacy
of planning to support the overall program.

GAO noted that: (1) DOD has underway an unprecedented program to use
competitions to gain economies and efficiencies in its operations and to
reduce support costs; (2) while the numbers have evolved over time, as
of now, DOD is planning to open over 229,000 government positions to
competition within the public and private sectors over the next several
years; (3) it estimates $6 billion cumulative savings between FY 1997
and FY 2003, and $2.3 billion in recurring savings each year thereafter,
as a result of these efforts; (4) however, estimates of competitive
savings provided to Congress in FY 1998 are overstated, and several
issues are likely to reduce the estimated savings, at least in the
short-term; (5) DOD has not fully calculated either the investment costs
associated with undertaking these competitions or the personnel
separation costs likely to be associated with implementing them; (6)
further, there are numerous indications that DOD components have already
begun to experience difficulties in launching and completing the
competitions within the timeframes they initially projected; (7) as a
result, the achievement of savings may be delayed; (8) various officials
have expressed concern about the effects of not achieving the expected
savings because reductions in future operating budgets have already been
planned in anticipation of these savings; (9) comprehensive planning to
identify specific functions and locations for competition among the
services has been limited; (10) within individual military services, it
has largely been up to individual installations or major commands to
identify and prioritize specific activities and functions for study and
to conduct competitions; and (11) the one service that has carried out a
comprehensive assessment, the Air Force, has identified a potential
shortfall in viable candidates for competition.

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

     TITLE:  DOD Competitive Sourcing: Questions About Goals, Pace, and 
             Risks of Key Reform Initiative
      DATE:  02/22/99
   SUBJECT:  Privatization
             Military downsizing
             Military budgets
             Program evaluation
             Future budget projections
             Military cost control
IDENTIFIER:  OMB Circular A-76 Program
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================================================================ COVER

Report to the Chairman, Subcommittee on Military Readiness, Committee
on Armed Services, House of Representatives

February 1999



DOD Competitive Sourcing


=============================================================== ABBREV

  CAMIS - Commercial Activities Management Information System
  DOD - Department of Defense
  FYDP - Future Years Defense Plan
  IFB - Invitation for Bid
  MEO - most efficient organization
  OMB - Office of Management and Budget
  OSD - Office of the Secretary of Defense

=============================================================== LETTER


February 22, 1999

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

Dear Mr.  Chairman: 

The Department of Defense (DOD) is using competitive sourcing\1
through the Office of Management and Budget (OMB) Circular A-76
process as a means of realizing an estimated $6 billion savings in
support costs between fiscal year 1997 and 2003, with over $2 billion
savings expected annually thereafter.  You asked that we review the
program's progress with an emphasis on the likelihood that it will
achieve the estimated savings.  Specifically, we (1) identified the
competition and savings goals, (2) assessed the accuracy of the
savings estimates provided to Congress, and (3) evaluated the
adequacy of planning to support the overall program.  Our scope and
methodology are included in appendix I. 

Under A-76, agencies conduct public/private competitions to determine
whether the public or private sector will perform selected activities
and functions.  In conducting competitions for functions being
performed in-house, agencies carry out studies to review the current
organizational structures, staffing, and operating procedures and to
determine the most cost-efficient and cost-effective way of
performing the functions. 

\1 Throughout this report, we use the term competitions when
referring to competitive sourcing governed by the A-76 process. 

------------------------------------------------------------ Letter :1

DOD has underway an unprecedented program to use competitions to gain
economies and efficiencies in its operations and to reduce support
costs.  While the numbers have evolved over time, as of now, DOD is
planning to open over 229,000 government positions to competition
within the public and private sectors over the next several years. 
It estimates $6 billion cumulative savings between fiscal year 1997
and 2003, and $2.3 billion in recurring savings each year thereafter,
as a result of these efforts. 

However, estimates of competitive savings provided to Congress in
fiscal year 1998 are overstated, and several issues are likely to
reduce the estimated savings, at least in the short term.  DOD has
not fully calculated either the investment costs associated with
undertaking these competitions or the personnel separation costs
likely to be associated with implementing them.  For example, the
Navy is the only service that has included some of these costs to
arrive at a net savings figure.  Further, there are numerous
indications that DOD components have already begun to experience
difficulties in launching and completing the competitions within the
time frames they initially projected.  As a result, the achievement
of savings may be delayed.  For example, Army headquarters estimated
that a study of 4,001 positions at its Training and Doctrine Command
would take only 24 months to complete, but the command expects to
complete the study in 39 months.  As a result, net short-term savings
are unlikely to be achieved in the amounts or as quickly as DOD
projected.  Various officials have expressed concern about the
effects of not achieving the expected savings because reductions in
future operating budgets have already been planned in anticipation of
these savings. 

Comprehensive planning to identify specific functions and locations
for competition among the services has been limited.  Within
individual military services, it has largely been up to individual
installations or major commands to identify and prioritize specific
activities and functions for study and to conduct competitions.  The
one service that has carried out a comprehensive assessment, the Air
Force, has identified a potential shortfall in viable candidates for

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

Since 1955, the executive branch has encouraged federal agencies to
obtain commercially available goods and services from the private
sector through competitions when the agencies determined that such
action was cost-effective.  OMB formalized the policy in OMB Circular
A-76, issued in 1966.  As part of this process, the government
identifies the work to be performed--described in the performance
work statement--and prepares an in-house cost estimate, based on its
most efficient organization (MEO), and compares it with the best
offer from the private sector.  Between 1978 and 1994, competition
winners were split between the private and public sectors.  Appendix
II contains a more detailed description of the A-76 process. 

Because of lengthy time frames previously required to perform
competitive sourcing studies, a provision was included in the DOD
Appropriations Act for Fiscal Year 1991 (P.L.  101-511), and in
subsequent DOD appropriation acts requiring that single function
competitions (under Circular A-76) be completed within 24 months and
multifunction competitions within 48 months.\2

Because of administrative and legislative constraints from the late
1980s through 1995, there was a lull--and for some time even a
moratorium--on competitions.  In 1995, congressional and
administration initiatives placed more emphasis on competitive
sourcing as a means of achieving greater economies and efficiencies
in operations.  The Deputy Secretary of Defense in 1995 directed the
services to make outsourcing of support activities a priority. 
Subsequently, DOD placed emphasis on competitions involving both the
public and private sectors, known as competitive sourcing. 

DOD components identify functions eligible for competitive sourcing
studies from a list of commercial activities.  Under OMB and DOD
guidance, the components must maintain and periodically update their
lists of commercial functions, but until fiscal year 1997, they were
only required to consider commercial positions that were not
inherently governmental in nature.\3 In 1997, DOD directed its
components to include inherently governmental functions on their

Because of concern over inconsistencies within and among the services
in identifying positions eligible for competition, the House National
Security Committee in report number 105-132 on H.R.  1119, the
Defense Authorization Act for Fiscal Year 1998, directed DOD to
develop a uniform set of criteria.  DOD's components are currently
reviewing which functions performed by DOD personnel are (1)
inherently governmental, (2) exempted from competition for national
defense reasons, (3) exempted from competition for other reasons, or
(4) subject to competitive sourcing competitions.  DOD expected to
report the results of this reassessment in January 1999. 

As we and others have reported, A-76 competitions can be
cost-effective.\4 Data indicates that savings can occur, regardless
of whether the competitions are won by the public or the private
sector.  Savings may increase if, in accordance with applicable legal
standards, multiple functions can be grouped together under a single
contract rather than under multiple contracts.  Because the average
military positions are more costly than their civilian equivalents,
greater savings may occur if DOD converts military support positions
to government civilian or contractor positions. 

While competitions can produce significant savings, caution is needed
when estimating the overall magnitude of potential savings. 
Estimates of savings in the 20- to 30-percent range or higher have
been cited in some assessments of previous competitive sourcing
studies but often have been based on initial savings estimates from
previous competitions, rather than on actual savings over time.  DOD
has not systematically tracked or updated the savings estimates from
competitions.  Further, the savings from current competitions may not
necessarily match those achieved in competitions completed before
defense downsizing--because personnel cuts carried out during
downsizing helped streamline organizations and eliminate unneeded

\2 A single function competition could, for example, involve studying
the custodial services at an installation, while a multifunction
competition could involve studying both custodial services and refuse
collection and disposal services. 

\3 Under the newly enacted Federal Activities Inventory Reform Act of
1998, P.L.  105-270, executive agencies, including DOD, will be
required to publish a yearly list of its activities that are not
inherently governmental and are performed by a government source.  As
defined by section 5 of the act, inherently governmental positions
generally require the exercise of discretion in applying government
authority or the use of value judgments in making decisions for the

\4 A complete list of recent GAO reports and testimonies dealing with
DOD competitive sourcing is included at the end of this report. 

------------------------------------------------------------ Letter :3

DOD has established far greater and more aggressive goals for
competitions than in the past.  DOD also estimates that the
competitions will bring significant cost savings.  OMB has recognized
DOD as the pacesetter among government agencies in the use of
competitions to gain economies and efficiencies in operations and to
reduce support costs.  However, achieving the goals of an initiative
of this magnitude is a significant management challenge. 

---------------------------------------------------------- Letter :3.1

According to DOD, between 1979 and 1996, it studied over 90,000
positions using the A-76 process.  In early 1998, DOD components
outlined plans to compete over 225,000 positions between fiscal year
1997 and 2003.  The number of positions planned for competition
during this period is more than twice the number of positions studied
in the previous 17 years.
Table 1 summarizes the plans by individual components as of early

                                     Table 1
                      Positions Planned for A-76 Competition

                                  Fiscal year
onen                                                                        Tota
t         1997      1998      1999      2000      2001      2002      2003   l
----  --------  --------  --------  --------  --------  --------  --------  ====
Army    13,173    13,484    13,477     8,146     8,138         0         0  56,4
Navy    10,500    15,000    20,000    20,000    15,000         0         0  80,5
Air   13,367\a    21,195    18,494    10,107         0         0         0  63,1
 For                                                                         63
Mari         0       800     1,700     1,700       800         0         0  5,00
 ne                                                                          0
Defe         0     2,151     6,442     3,002     2,288     6,542         0  20,4
 nse                                                                         25
Tota    37,040    52,630    60,113    42,955    26,226     6,542         0  225,
 l                                                                          506
\a Includes some positions announced in previous years. 

\b Figures shown represent data obtained from the Defense Finance and
Accounting Service, Defense Logistics Agency, and Defense Commissary

Source:  Services as of February 1998 and agencies as of May 1998. 

According to our analysis, DOD's data indicates that about 79 percent
of the positions identified in table 1 are civilian positions, while
21 percent are military positions.  Over half of all the military
positions to be competed are in the Air Force.  The greatest number
of positions competed would occur during fiscal years 1999 and 2000. 
As indicated in figure 1, if DOD components launch the competitions
projected for fiscal years 1999 and 2000, and if each competition
lasts 24 months, DOD could be competing over 100,000 positions each
year during 1999 and 2000.\5

   Figure 1:  Positions
   Potentially Under A-76
   Competition Between Fiscal Year
   1997 and 2003

   (See figure in printed

Note:  The dark grey areas in the bars indicate competitions begun in
the previous year. 

Source:  Our calculations based on information from DOD. 

Between March 1997 and early 1998, DOD increased the number of
positions it plans to compete over the next several years by about 30
percent--from 171,000 to over 225,000.  In October 1998, DOD again
increased the number of positions expected to be competed to over
237,000 and stretched out the time frame to 2005.  However, that
figure was recently adjusted to 229,000 by 2005.  We were unable to
obtain details of how the new numbers would be allocated among the

Prior to establishing the competition goal of 229,000 positions, DOD
aimed for cumulative savings of about $6 billion between fiscal years
1997 and 2003.  That goal still existed at the time we completed our
review and DOD has already begun to reduce future years operating
budgets of components in anticipation of these savings and to
transfer the expected savings to their research and development and
procurement accounts to increase funding for weapon system

Office of the Secretary of Defense (OSD) guidance projects that
components will complete competitions within 2 years and begin
transferring funds to higher resource priority budget objectives. 
According to OSD officials, if the savings do not occur as quickly as
planned, the components will have to absorb the shortfalls in their
operations and maintenance accounts or shift money back from planned
modernization.  The Army's competitive sourcing strategic plan, for
example, states that if major commands do not achieve programmed
savings, they will have to achieve the savings through other

The savings estimates could change.  A DOD official told us that,
after receiving more detailed information from its components, DOD
reduced its projected annual recurring savings as of fiscal year 2004
from $2.5 billion to $2.3 billion.  This savings figure was still
under review when we completed our fieldwork and OSD had not yet
decided whether to revise its savings goals or its timetables for
achieving them when we completed our review. 

\5 The DOD budget guidance planning factor for the duration of its
A-76 studies is 24 months. 

------------------------------------------------------------ Letter :4

The projections of competition savings that DOD provided to Congress
in fiscal year 1998 appear overstated.\6 The projections did not
adequately consider investment costs related to performing A-76 cost
studies.  In addition, the competitions will likely take longer to
complete than estimated.  Both of these factors will affect how
quickly DOD components will begin to realize net savings from the
competitions.  DOD components have expressed concerns about their
ability to meet the savings goals.  DOD is working to improve these
estimates for its fiscal year 2000 budget request. 

\6 Our prior reports and testimonies have raised concerns about the
services' estimated savings rates from individual competitions;
however, for the purposes of this analysis, we accepted DOD's

---------------------------------------------------------- Letter :4.1

Much like base realignment and closure actions, competitions have
up-front investment costs that need to be considered when estimating
net savings.  In competitions, these investments involve study costs,
personnel separation costs, and, in the case of the Army, the costs
of substituting civilians for military personnel.  Once these
investment costs have been offset by program savings, net savings can
begin to accrue on an annual recurring basis.  However, available
information indicates that OSD and its components have not fully and
consistently accounted for and deducted these investment costs from
their savings projections.  This means that DOD will not accrue the
estimated initial savings as quickly as projected.  However,
recurring long-term net savings are potentially significant. 

Both OSD and its components made initial assumptions about
competition study costs that are understated.  While the components
are registering concern about these costs, they have not yet
developed comprehensive assessments of them. 

DOD reported to Congress in April 1998 that the services expected
savings of about $5.8 billion from their competitions and investment
costs of $277 million to conduct the competitions.\7 Table 2
indicates the savings projected by each service and the identified
costs to implement the program. 

                                Table 2
                   Projected Competition Savings and
                 Investment Costs (fiscal year 1997 to

                         (Dollars in millions)

                                         Air            Marine
                              Army     Force    Navy     Corps   Total
--------------------------  ------  --------  ------  --------  ======
Investment Costs\a             $48      $0\b   $195\       $34    $277
Savings                     $1,272  $1,825\c  $2,533      $215  $5,845
\a Primarily for centrally funded contractor support of the

\b Subsequent to DOD's report, costs of $53 million were identified
by the Air Force. 

\c Includes $378 million from competitive sourcing efforts at its
maintenance depots, which are not governed by OMB Circular A-76. 

\d This report to Congress excluded projected savings from defense
agencies that could amount to several hundred million dollars. 

Source:  Oversight of Outsourced Functions, DOD report to Congress. 

DOD's savings projections provided an inconsistent and incomplete
picture of A-76 competitive sourcing costs and savings for the period
ending in fiscal year 2003.  Only the Navy deducted identified
investment costs from its net savings estimate.  Additionally,
available information indicates that DOD and its components
understated or later changed their initial estimates of investment

\7 The House Committee on Armed Services (formerly known as the
National Security Committee), in report number 105-132, cited
earlier, requested that DOD report on its oversight of outsourced
functions.  The savings and investment costs contained in this
report, which were based on the fiscal year 1999-2003 Program
Objective Memorandum, did not include A-76 initiatives at DOD

-------------------------------------------------------- Letter :4.1.1

Although the magnitude of the competition program greatly eclipses
previous efforts, DOD components have not yet fully identified the
resources needed to carry out the competitions.  Many components are
now projecting that the competitions will likely take much longer and
hence require a greater investment of resources than they originally
expected and reported to Congress.  Many components have noted that
this situation is occurring when they have significantly fewer
in-house personnel trained to deal with A-76 programs than they had
prior to downsizing. 

Conducting the competitions may require the use of contractors in
addition to existing in-house staff from contracting, personnel,
legal, manpower, accounting, internal audit, and the function being
studied.  To the extent existing in-house resources are limited, if
resources need to be shifted to meet new missions, such as performing
competitions, other tasks or activities may be delayed or not

DOD initially established a benchmark estimate for competition costs
of $2,000 per position.  The benchmark was based on an Air Force
analysis of the costs it incurred in performing A-76 studies with
in-house personnel.  However, that analysis did not include an
estimate of costs for developing in-house most efficient
organizations, raising concerns that it may have understated the
magnitude of the needed resources.  In DOD's April 1998 report, the
military services estimated different investment costs, some of which
were higher than the DOD benchmark.  The Air Force did not identify
costs because it planned to use only existing in-house staff to
perform the work, but will now augment some studies with contractor
support.  The Navy, however, only identified estimated contractor
support costs for conducting the competitions of over $2,400 per
position.  The Army based its investment cost estimate only on
contractor support costs of $1,000 for each civilian position, but it
did not include funding for competing military positions.\8 The
Marine Corps estimated that its competitions would cost $6,700 per
position and that at least 80 percent of this would fund contractor

Various officials told us that the resource requirements for the
studies are much greater than both DOD's $2,000 benchmark and their
service's own initial estimates.  For example, officials at one Army
major command estimated that they would employ about $28 million in
resources for their competitions--$4 million for centrally funded
contractor support costs and $24 million for existing in-house
staff--to compete 4,000 positions in a multifunction, multilocation
study, at least $7,000 per position.  One Navy command estimated that
it would incur about $15 million in costs--$2.8 million for
contractor support and $12.2 million for existing in-house staff--to
compete close to 1,930 positions at various locations, or about
$7,800 per position.  A second Navy command estimated that it was
spending between $7,000 and $9,000 per position--about $2,000 for
centrally funded contractor support and between $5,000 and $7,000 for
existing in-house staff to conduct competitions.  Command officials
stated that the command had not received any additional funding for
the competitions and that the command would therefore have to provide
the additional resources.  The large number of competitions planned
for the future could necessitate a change in the mix of in-house and
contractor personnel required to support the planned competitions. 
Such changes would affect the extent to which additional funding
outlays could be required in addition to those already associated
with in-house personnel. 

While none of the services has yet fully determined the staff
resources necessary to implement its competition program, some
service officials have expressed concern about their ability to
provide sufficient existing in-house staff as the number of ongoing
studies increases and the potential effect on other mission
requirements of devoting available resources to meet competition
needs.  Some officials have already begun to express concern about
the adequacy of their resources to initiate and complete ongoing
competitions and to deal with other ongoing mission responsibilities. 
Officials at one Army command stated that they have finite resources
to accomplish their overall missions and tasks.  If one mission, such
as performing competitions, is given command priority, resources are
shifted to meet that priority, and other tasks or activities may be
delayed or not performed.  The large increase in the number of
competitions expected to be ongoing in fiscal years 1999 and 2000 is
likely to greatly increase resource requirements. 

Without allocating sufficient resources to complete the competitions,
DOD components may be unable to initiate or complete previously
announced competitions within reasonable time frames.  The pressure
to complete such a large volume of competitions at one time increases
the risk of poorly developed performance work statements, which have
historically been cited as a problem area in the competitions.  Poor
performance work statements require subsequent revisions, reducing
the levels of savings from that initially expected. 

In July 1998, DOD issued guidance directing the components, when
preparing operation and maintenance budget justification material for
the fiscal year 2000 defense budget, to (1) report actual and
projected competition costs, (2) explain the methodology used to
develop the costs, and (3) justify deviations from the average cost
of $2,000 per position.  This information should become available
when DOD releases its fiscal
year 2000 budget request. 

\8 The Army subsequently revised its cost estimate to $1,500 per
civilian position studied. 

-------------------------------------------------------- Letter :4.1.2

Except for the Navy, the services understated investment costs
because they did not include separation costs for civilian and
military DOD employees who lose their jobs as a result of
competitions won by the private sector.  Implementation costs may
also be incurred when in-house organizations win the competitions and
the most efficient organizations require a smaller workforce. 

Assuming that the private sector continues to win competitions at the
historic rate of 50 percent as determined by the Center for Naval
Analyses, DOD could transfer work involving more than 100,000
positions to the private sector over the next several years--if it
meets its goal of competing over 225,000 positions.  Many of the
affected civilian government workers could receive some form of
separation pay.  The Army, for example, estimated an average cost of
$21,000 per person separated.  This average covers the costs of
voluntary early retirement, voluntary separation incentives, and
involuntary separations through reduction-in-force procedures.  The
Navy estimated an average of $25,000 per person and the Air Force an
average of $33,000, of which $25,000 would be funded by headquarters
and $8,000 would be funded by individual commands. 

Even if some affected employees fill other positions through DOD's
priority placement program, significant numbers of government
personnel could still be separated.  On the basis of its average
separation cost of $21,000 per employee, the Army's Program Analysis
and Evaluation office conservatively programmed separation costs of
about $200 million for only 9,600 employees.  The office recognized,
however, that the Army would likely separate more personnel.  The Air
Force programmed $10 million in civilian separation costs for fiscal
year 1999 and programs only 1 year in advance.  The Navy did not
program any separation costs and will not have a programming estimate
until January 1999 for inclusion in the fiscal
year 2000 budget.  However, the Navy's competitive sourcing office
projected civilian separation costs of $819 million for 68,250
civilian positions and deducted these costs to reach the savings
estimate of $2.5 billion through fiscal year 2003, that was reported
to Congress in 1998. 

In July 1998, DOD issued budget guidance directing defense
organizations, when preparing their operation and maintenance
justification materials for the fiscal year 2000 defense budget, to
report transition costs (such as separation pay and voluntary
separation incentive pay) they plan to incur and to disclose the
methodology and cost categories used to determine those costs. 

-------------------------------------------------------- Letter :4.1.3

We have previously reported that, on average, the cost of civilian
personnel is less than the cost of military personnel.  In addition,
we have also reported that the conversion of positions from military
to civilian (either government or contractor) as part of the
competitive sourcing process could save money, assuming that the
elimination of the military positions results in corresponding
reductions in the authorized end strengths.  Such reductions are not
expected to be the case for the Army where competitive sourcing
eliminates requirements for military positions, without corresponding
reductions in authorized end strength. 

The Army's 1998 plan called for competing 8,414 military positions.\9
However, while the Army plans to convert all military positions
competed to civilian or contractor positions, it does not expect to
take equivalent reductions in military end-strength.  Rather, it
expects to use military personnel released as a result of the
competitions to fill other priorities.  Thus, the Army's overall
costs will increase by the cost of civilian or contractor personnel
selected to replace these military personnel.\10 At the same time,
the Army will have to absorb some increases in operations and
maintenance costs without additional funding for increased civilian
government or contractor costs. 

\9 The Army's proposed plan for the fiscal year 2000 defense budget
changed the number of military positions to be competed to 6,420. 

\10 The costs of military positions are funded through military
personnel appropriation accounts, whereas funding for costs
associated with government civilian or contractor personnel are
funded through operation and maintenance appropriation accounts. 

---------------------------------------------------------- Letter :4.2

As mentioned previously, planned competitions will probably take
longer than initially projected.  In addition to increasing the study
costs, this will also delay net savings.  Meanwhile, the services are
voicing concerns about their ability to meet the savings targets
needed to offset operating budget reductions taken in advance and in
anticipation of the savings. 

In launching the competition program, DOD and its components made
assumptions about the amount of time needed to complete these
competitions.  DOD's guidance for preparation of the fiscal year 2000
defense budget indicates that competitions should typically take
24 months to complete.  The Army and the Navy initially set more
optimistic goals, but many service officials later came to believe
that many studies would take longer than 24 months. 

The Army's Office of the Assistant Chief of Staff for Installation
Management has served as the primary lead for Headquarters,
Department of the Army, on issues affecting the implementation of the
competitions.  This office set competition goals of 13 months for up
to 100 positions,
18 months for 101 to 600 positions, and 21 months for over 600
positions.  However, Army officials recently expressed some concern
about their ability to meet this schedule.  For example, the Army's
Training and Doctrine Command is conducting a command-wide study of
4,001 positions at 12 installations.  This was announced to Congress
in November 1996, and Army headquarters projected completion within
24 months.  However, because the start of the study was delayed by 6
months and because the competitions cover multiple functions at 12
locations, with phased implementation, the command currently projects
completing the last installation by February 2000, or 39 months after
it was announced. 

Initially, the Navy projected completing its competitions in 12
months, but it revised its assumptions when preparing its 1998 plan
because some competitions were taking longer.  The 1998 plan
estimates that competitions will take between 12 and 36 months,
depending on their complexity and including whether they are based on
competitions of single or multiple functions. 

An Air Force official responsible for program oversight told us that
the Air Force currently projects completing competitions within 24 to
48 months and that it expects to meet these time limits. 

---------------------------------------------------------- Letter :4.3

Since DOD began to emphasize competitions, the goals for the
competitions have evolved and grown, even though some DOD components
have had difficulties in meeting recent goals for announcing
competitions.  Some components have expressed concerns about these

OSD officials responsible for monitoring the program consider
execution the biggest risk factor.  DOD did not have under study all
of the positions it planned to study in fiscal years 1997 and 1998
because some competitions that were announced were later canceled,
and not all of the remainder were under study.  DOD's components
planned to announce competitions involving 37,040 positions in fiscal
year 1997, but, after cancellations and delayed starts of
competitions, they had at most 34,997 positions under study.\11 In
fiscal year 1998, DOD's components expected to announce competitions
involving 52,630 positions, but due to shortfalls by the Navy, the
Marine Corps, and the Air Force, they announced plans for competing
only 35,710 positions and, after cancellations and delayed starts of
competitions, had at most 32,229 positions under study. 

According to a Navy official, the Navy was unable to meet its fiscal
year 1998 announcement goals because implementing concurrent
initiatives such as competitions, regionalization, and consolidation,
and meeting mission and mission support requirements stretched
available personnel and financial resources.  While it did not change
the total number of positions it planned to compete between 1997 and
1998, the Navy did change the mix of military and civilian positions
and some of its other planning assumptions to meet readiness needs
and maintain its projected level of savings.  In its fiscal year 1997
plan, the Navy projected competing 30,000 military positions. 
However, in response to growing concerns about the effect of
competitions on the military positions needed to meet sea-shore
rotation requirements and other concerns, the Navy in 1998 reduced
the number of military positions it would compete by 20,000 and
increased the number of civilian positions it planned to compete by
the same number.  Such a change could mean the potential for
significantly less savings since military positions are recognized as
relatively more costly to the government. 

Officials in the Air Force's competitive sourcing and privatization
office said that the Air Force, in developing its fiscal year 2000
budget request, reduced the total number of positions it planned to
compete between fiscal year 1998 and 2003 by 23,976 (48 percent). 
The Air Force did so after completing an analysis and determining
that some positions were not viable candidates because some positions
were being double counted with ongoing base closure reductions and
other positions were not practical to package for competition. 
However, the officials also said that OSD only agreed to a reduction
of about 10,600 positions.  Additionally, the Air Force proposed
reengineering various functions to achieve additional savings of
about $700 million, about $116 million more than was planned to have
been saved with the competitions. 

As previously noted, Marine Corps officials have indicated that they
do not believe they can meet their savings goals with the number of
positions currently planned for competition.  The officials said that
the Marine Corps plans to increase the number of positions to be
competed from 5,000 to about 6,200. 

One difficulty the services are likely to face as they try to
identify more competition candidates is the continuing reduction in
personnel caused by other ongoing defense reform efforts, cuts
mandated by the Quadrennial Defense Review, or other initiatives. 
Reductions are also planned as a result of legislative requirements. 
These other ongoing defense reforms could limit the number of
positions ultimately available for competition under the competitive
sourcing program. 

\11 The Army's and the Air Force's tracking systems are unable to
provide the number of positions under study, but Army officials said
that revisions to that system should permit that data to be tracked
in the future and Air Force officials said that their competitions
typically start right after announcement. 

-------------------------------------------------------- Letter :4.3.1

Various service officials pointed to extensive reductions in base
operating support budgets in recent years and expressed concern about
the additional reductions that are expected in addition to cuts
associated with competitions.\12

They expressed concern about their ability to absorb further
reductions "out of hide" should they miss their competition savings

Recently, officials in all of the services have voiced concerns about
their ability to meet the savings goals established by OSD and the
resulting effects, especially considering that the savings have
already been taken out of future years' operating budget estimates. 
For example, an Air Force official told us that the Air Force's major
commands will fall short of A-76 savings by about $141 million in
fiscal years 1998 and 1999 and that they will have to absorb these
shortfalls.  Another Air Force official said that most major commands
are concerned about the effects of funding A-76 competitions and of
personnel separation costs on their installations. 

Army officials, based on work by the Army Audit Agency, have
expressed concern that delayed competition starts could reduce the
Army's proposed fiscal year 2000 budgeted gross savings of $1.6
billion for fiscal years 1999 to 2003 by nearly $219
million--assuming the competitions are completed within the time
frames initially projected, something which the officials consider
unlikely.  Another Army official indicated that even if the Army can
complete all of its targeted competitions by 2003, it may take
1 to 2 years to implement the results, reduce the workforce, and
begin achieving the targeted savings.  Additionally, the Army Audit
Agency recently stated that the Army's installations and major
commands estimate that it will take about 50 percent longer than the
time established by the Assistant Chief of Staff for Installation
Management to complete the competitions and achieve the expected

Further, an official at the Army's Training and Doctrine Command
stated that the command would not meet its $62-million savings goal
in fiscal year 1999 and most of fiscal year 2000.  The official
stated that the competitions are taking longer than Army headquarters
officials projected and that could result in an operations and
maintenance funding shortfall. 

Officials at the Naval Sea Systems Command stated that they do not
believe A-76 competitions alone will be enough for the command to
meet its savings goals because there are not enough positions to
compete.  While the command has a goal to compete 16,415 civilian
positions, it had only 7,179 positions categorized as suitable for
competition as of October 1998, after its commercial activities
inventory review.  Since the commercial activities inventory review
was still ongoing when we completed our review, we were not able to
obtain information on its overall results. 

In addition, the Navy's acquisition executive stated in April 1998
that while the Navy would do everything possible to absorb the
savings goals, he did not see any way to do this.  He established a
Process Action Team to review the competitive sourcing program
because he believed that the savings were considerably overstated and
would result in even more instability in the procurement account. 

Although Marine Corps officials told us that they expected to
increase the number of positions to be competed, they also said, at
another point, that they could not meet their savings target through
A-76 competitions alone.  They said they would attempt to make up the
shortfall through alternative reform initiatives such as
consolidation, regionalization of existing functions, and greater use
of technology. 

\12 We previously reported that during fiscal years 1987-1996, total
operation and maintenance budget authority declined by 25 percent in
real terms, reflecting the overall decline in defense spending. 
However, annual operation and maintenance obligations for facilities
maintenance and repair, excluding family housing, declined by 38
percent on average in real terms during the period.  The Army had the
steepest decline of all, about 48 percent.  See Defense
Infrastructure:  Demolition of Unneeded Buildings Can Help Avoid
Operating Costs (GAO/NSIAD-97-125, May 13, 1997). 

\13 Observations and Lessons Learned on A-76 Cost Competition
Studies, U.S.  Army Audit Agency
(AA 98-340 Sept.  22, 1998). 

------------------------------------------------------------ Letter :5

DOD has provided the needed high-level emphasis, momentum, and
sponsorship to energize its competition program and has identified
what some have referred to as "stretch goals" in characterizing the
larger number of positions to be competed.  However, comprehensive
planning among the services to identify specific functions and
locations for competition has been limited.  Detailed planning to
implement the program has been largely delegated to components and
field activities.  These activities are responsible for determining
the specific functions that are suitable candidates for competition
and whether there are sufficient positions to meet overall
competition goals.  Such planning is needed to better identify
long-term resource needs, especially considering the volume of
studies likely to be under way in the future. 

To date, the Air Force appears to have performed the most detailed
multiyear implementation analysis of its ability to attain its
competition goals.  The Army, the Navy, and the Marine Corps have not
performed a multiyear implementation analysis by function and
location, and the Navy and the Marine Corps were unable to provide us
with plans of the numbers of positions for competition and projected
savings for each major command through fiscal year 2003.  The Navy
and the Marine Corps are currently developing multiyear competitive
sourcing implementation analysis by function and location.  The Navy
analysis for fiscal years 1999 to 2001 is scheduled to be completed
by June 1999 and the Marine Corps plan for fiscal years 2000 to 2002
is expected to be completed by April 1999.  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. 

The Navy started developing a strategic plan for competitions in
September 1997, about 2 years after the Chief of Naval Operations
revitalized the Navy's competition program.  In response to a prior
GAO recommendation, the Navy expects to develop a detailed 5-year
plan as part of its overall strategy and expects the major commands
to develop an execution plan.  The Navy expects to have a reasonable
and achievable strategic plan for competitions by early fiscal year
1999.  The extent to which this strategic plan will be based on a
detailed implementation analysis is unknown at this time. 

The Army published a competition strategy in September 1998 but has
not conducted a detailed implementation analysis of the program to
assess its executability.  The strategy lays out a number of
high-level goals and identifies ways to meet them.  In implementing
its strategy, the Army is placing primary responsibility for
selecting and prioritizing functions and conducting competitions on
the installation commanders.  Army officials told us that each year,
the major commands develop a plan that identifies the functions the
commands will study at their installations that fiscal year.  If the
major commands do not achieve the programmed savings from
competitions, they must achieve the savings through other
efficiencies or local personnel management actions.  The Army has
also established a competitive sourcing and privatization Integrated
Process Team and made it responsible for recommending a new
management structure to oversee the program and changes to streamline
processes.  Team officials recommended that the Army develop
competition plans for the fiscal
year 2001 to 2005 time frame by April 1999.  The recommendations were
made on November 19, 1998, and are currently awaiting approval from
the Army Vice Chief of Staff.  The extent to which the competition
plans will be based on a detailed implementation analysis is unknown
at this time. 

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 to 2005 Program Objective Memorandum. 
OSD directed that these plans should include, by fiscal year, the
functions and numbers of positions to be competed. 

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

DOD has established an ambitious competition program as a means of
reducing its infrastructure support costs and increasing funding
available for modernization and procurement.  Establishing realistic
competition and savings goals are key to achieving the program's
desired results.  However, DOD's savings projections have not
adequately accounted for the costs of conducting the competitions. 
These costs could significantly reduce DOD's expected level of
savings in the short term.  In addition, the planned competitions are
likely to take longer than initially projected, further reducing the
annual savings that will be realized.  Consequently, the estimated
savings between fiscal year 1997 and 2003 are overstated.  The
effects of failing to realize these annual savings could be
significant, since DOD has already reduced future operating budget
estimates to take into account the estimated savings. 

Also, the number of competitions DOD expects to complete over the
next several years continues to increase, even as difficulties in
meeting previous goals grow.  Service officials are increasingly
expressing concern about their ability to meet these targets,
especially considering the unprecedented number of competitions that
are planned to be ongoing simultaneously in the near future. 
Finally, we believe there is merit to this concern because most
components lack detailed plans and analyses to help determine whether
the numbers of positions to be competed would be practical. 

------------------------------------------------------------ Letter :7

We recommend that the Secretary of Defense require the DOD components
to assess to what extent available resources are sufficient to
execute the numbers of planned competitions within the time frames
envisioned and make such adjustments as needed to ensure adequate
program execution.  In doing so, we also recommend that the Secretary
require the components to reexamine and adjust as necessary the
competitive sourcing study targets, milestones, expected net
short-term savings, and the planned operating budget reductions. 

------------------------------------------------------------ Letter :8

In commenting on a draft of this report, DOD concurred with our
conclusions and recommendations (see appendix III).  However, the
response also indicated that DOD does not believe that its components
have completed enough studies since fiscal year 1997 to establish a
baseline that would necessitate the reevaluation of competitive
sourcing milestones and objectives at this time, as our report
recommends.  DOD noted that the Deputy Secretary of Defense had
proposed a number of initiatives in a December 9, 1998, memorandum to
the Defense components that will make better use of existing
resources devoted to competitive sourcing studies.  However, DOD did
not indicate at what point it would establish a new baseline. 

We continue to believe that DOD has sufficient reason to reassess the
competitive sourcing study targets, milestones, expected short-term
savings and planned operating budget reductions now.  The issues at
hand involve more than the number of competitions completed, they
also involve to what extent the planned announcements of competitions
have occurred and whether there are sufficient resources to complete
them.  This is of concern especially given 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
underway.  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.  Accordingly, an
important part of any reassessment should also include examining the
components' progress in developing detailed implementation plans;
such plans will have a direct bearing on resource requirements. 

DOD also provided technical comments to the draft, which we have
incorporated as appropriate. 

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

We are sending copies of this report to the Chairmen of the Senate
Committees on Armed Services and on Appropriations and of the House
Committees on Armed Services and on Appropriations; the Secretaries
of Defense, the Army, the Air Force, and the Navy; the Commandant of
the Marine Corps; and the Director, Office of Management and Budget. 

Please contact me at (202) 512-8412 if you or your staff have any
questions concerning this report.  Major contributors to this report
are in
appendix IV. 

Sincerely yours,

David R.  Warren, Director
Defense Management Issues

=========================================================== Appendix I

For this report, we (1) identified the Department of Defense's (DOD)
competitive sourcing study and savings goals, (2) assessed the
accuracy of the savings estimates provided to Congress, and (3)
evaluated the adequacy of program planning to support the overall

To determine the Office of the Secretary of Defense's (OSD) process
for managing the A-76 savings targets, we met with representatives of
the Defense Management Council, including OSD's Office of Program
Analysis and Evaluation and the A-76 Task Force in the Office of the
Deputy Under Secretary of Defense for Industrial Affairs and

To identify DOD's competitive sourcing study and savings goals and
assess how well investment costs are reflected in the savings
estimates, we obtained and analyzed the planning assumptions each
military service and OSD used.  We did not use the budget
justification material on competitive sourcing contained in the 1999
to 2003 Future Years Defense Plan (FYDP) because of certain
limitations in the data.  Instead, we obtained comprehensive
information from each service on the numbers of positions planned for
study that served as the basis for projected savings between 1997 and
2003, which included studies in one service that began as early as
1993.  Therefore, while the 1999 FYDP material lists studies of
approximately 214,000 positions, our discussions with DOD components
identified over 225,000 positions either already competed, under
study, or planned for competition.  We also obtained information on
unrecognized costs, such as separation costs, from the Air Force's
and the Navy's comptroller's offices, as well as the Army's Office of
Program Analysis and Evaluation.  We did not determine the
reliability of the cost information provided by these offices.  We
met with officials from the Center for Naval Analyses to discuss
their work on competitive sourcing within DOD, and obtained copies of
their reports.  We also spoke with responsible OSD, service, and
installation officials, including manpower, contracting, and
financial management officials to obtain information on the personnel
resources required to conduct the studies and their ongoing efforts
to reform their commercial activities databases. 

To determine the extent to which uncertainties exist about meeting
study goals and savings targets in the projected time frames, we met
with responsible officials from OSD, the Army, the Air Force, the
Navy, and the Marine Corps and contacted officials from defense
agencies and installations.  We obtained documentation on past,
ongoing, and planned A-76 studies. 

To evaluate the adequacy of the advance planning to support the
effort underway, we met with representatives of the Defense
Management Council and the A-76 Task Force, as well as cognizant
service officials, to discuss their oversight role and the program
implementation risks.  We also researched relevant laws cited by

We performed much of our work in Washington, D.C.  However, we also
conducted work at the Air Force Air Education and Training Command,
San Antonio, Texas; the U.S.  Army Training and Doctrine Command,
Fort Monroe, Virginia; and the Naval Air Systems Command, Patuxet
River, Maryland. 

We conducted our review from September 1997 to December 1998 in
accordance with generally accepted government auditing standards. 

========================================================== Appendix II

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 MEO; (4) issuing a Request for
Proposals or Invitation for Bid; (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 II.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. 

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

   (See figure in printed

Source:  Air Force Air Education and Training Command documents. 

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 OMB's A-76 guidance, the government's in-house estimate
wins the competition unless the private sector's offer meets a
threshold of savings that is at least 10 percent of direct personnel
costs or $10 million over the performance period.  This minimum cost
differential was established by the Office of Management and Budget
(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 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. 

(See figure in printed edition.)Appendix III
========================================================== Appendix II

========================================================== Appendix IV


Barry W.  Holman, Associate Director
Marilyn K.  Wasleski, Assistant Director
David B.  Best, Evaluator-in-Charge
Daniel B.  Mezger, Evaluator
David W.  Rowan, Senior Evaluator


Neil H.  Gottlieb, Senior Evaluator
James E.  Fuquay, Senior Evaluator
Cheryl K.  Andrew, Senior Evaluator

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*** End of document. ***