oversight

Defense Management: DOD Faces Challenges Implementing Its Core Competency Approach and A-76 Competitions

Published by the Government Accountability Office on 2003-07-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to the Ranking Minority
             Member, Subcommittee on Military
             Readiness, Committee on Armed
             Services, House of Representatives

July 2003
             DEFENSE
             MANAGEMENT
             DOD Faces
             Challenges
             Implementing Its
             Core Competency
             Approach and A-76
             Competitions




GAO-03-818
                                                July 2003


                                                DEFENSE MANAGEMENT

                                                DOD Faces Challenges Implementing
Highlights of GAO-03-818, a report              Its Core Competency Approach and
to the Ranking Minority Member,
Subcommittee on Military Readiness,             A-76 Competitions
Committee on Armed Services,
House of Representatives




The Department of Defense (DOD)                 Progress in assessing core functions has been varied and limited across
is pursuing a new initiative                    major Defense components, affected somewhat by ambiguous definitions
involving a core competency                     of the term “core function.” In some instances additional guidance was
approach for making sourcing                    obtained, but definitions of core remain somewhat broad and subjective,
decisions—that is, sourcing                     and will likely remain so in the future. Army and Air Force have led within
decisions based on whether the
function is core to the agency’s
                                                DOD in assessing core functions, but the Army has done the most, and
warfighting mission. In determining             found, contrary to its expectations, that distinguishing between core and
how to best perform non-core                    non-core functions does not, by itself, prescribe a sourcing decision. Other
functions, DOD’s position is that its           factors must also be considered such as risk and operational considerations.
components should look beyond
just the use of public-private                  The range of alternatives to A-76 likely to be pursued under the core
competitions under Office of                    competency-based approach is not yet clear, but DOD has made some
Management and Budget (OMB)                     progress toward identifying and/or using some alternatives through pilot
Circular A-76 in making sourcing                projects and other efforts by the services as they have focused on the core
decisions, and consider other                   initiative. However, the use of alternatives could be limited without
alternatives such as partnering                 special legislative authorities and/or repeal of various existing prohibitions,
or employee stock ownership.
GAO was asked to assess (1) the
                                                and some could be tempered by the department’s efforts to meet the A-76
department’s progress in assessing              competitive sourcing goals set by OMB.
its core functions as a basis for
sourcing decisions, (2) the plans               DOD reported that as of June 1, 2003, it has met OMB’s short-term goal to
and progress DOD has made                       use the A-76 process to study 15 percent of the positions identified in DOD’s
in identifying and implementing                 commercial activities inventory by the end of fiscal year 2003. However,
alternatives to A-76, and (3) the               meeting the longer-term goal to study at least 50 percent (226,000) of its
current status of DOD’s A-76                    nearly 453,000 commercial activity positions through fiscal year 2008 will
program.                                        present a challenge. This is nearly double the number of positions that DOD
                                                has previously studied during a comparable time period, and providing
                                                sufficient resources (financial and technical) to complete the studies may
GAO is recommending that DOD                    prove challenging. Also, the defense components, particularly the Air Force,
clarify its expectations for                    plan to transfer certain military personnel into warfighting functions and
sourcing decisions based on core                replace them with government civilian and/or contractor personnel. This will
competency assessment results                   require the components to reprioritize their funding for operation and
and provide guidance on additional              maintenance accounts, because it is from those accounts the services must
factors that should be considered               fund replacement civilian or contractor personnel.
in reaching a sourcing decision;
and ensure that conversion of
                                                DOD’s A-76 Positions Completed and OMB’s Goal, Fiscal Years 1997-2008
functions from performance by
military to government civilian or
contractor personnel have clearly
identified sources of funding to
support those decisions. The
department generally concurred
with the recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-03-818.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Barry W.
Holman at (202) 512-8412 or
holmanb@gao.gov.
Contents


Letter                                                                                 1
               Results in Brief                                                        2
               Background                                                              5
               Progress in Assessing Core Functions Has Varied Across the
                 Defense Components and Has Been Affected Somewhat by
                 Definitions of “Core”                                                 9
               Some Progress Made in Identifying Alternative Sourcing
                 Arrangements, but the Extent to Which Alternatives Are Likely
                 to Be Used Is Unclear                                                18
               DOD Expected to Maintain an Active A-76 Competitive
                 Sourcing Program                                                     23
               Conclusions                                                            29
               Recommendations                                                        29
               Agency Comments and Our Evaluation                                     30
               Scope and Methodology                                                  30

Appendix I     Alternatives to A-76 for Sourcing
               Non-Core Competencies                                                  33



Appendix II    Army’s Plans for Transforming Its In-House
               Industrial Facilities                                                  37



Appendix III   Senior Executive Council Definitions of Core
               Competency                                                             38



Appendix IV    Pioneer Projects                                                       39



Appendix V     Comments from the Department of Defense                                42



Appendix VI    GAO Contact and Staff Acknowledgments                                  44




               Page i                                      GAO-03-818 Defense Management
Related GAO Products                                                                          45



Tables
                       Table 1: Pioneer Projects Submitted to OMB                             19
                       Table 2: DOD Positions Announced for Study under A-76,
                                by Component, Fiscal Years 1997-2002                          24
                       Table 3: Number of Positions for Which A-76 Studies Have Been
                                Completed, by Component, Fiscal Years 1997-2002               25
                       Table 4: Number of Positions for Which A-76 Studies Are Ongoing,
                                by Component and Year When Study Was Announced,
                                Fiscal Years 1999-2003                                        25


Figure
                       Figure 1: DOD’s A-76 Positions Completed and OMB’s Goal,
                                Fiscal Years 1997-2008                                        24




                       Page ii                                     GAO-03-818 Defense Management
Abbreviations

AMC               U.S. Army Materiel Command
CAMIS             Commercial Activities Management Information System
CINC              commander-in-chief
DFAS              Defense Finance and Accounting Service
DLA               Defense Logistics Agency
DOD               Department of Defense
ESOP              Employee Stock Ownership Plans
FAIR              Federal Activities Inventory Reform Act
NSA               National Security Agency
OMB               Office of Management and Budget
TBC               Transitional Benefit Corporations




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Page iii                                                GAO-03-818 Defense Management
United States General Accounting Office
Washington, DC 20548




                                   July 15, 2003

                                   The Honorable Solomon P. Ortiz
                                   Ranking Minority Member
                                   Subcommittee on Military Readiness
                                   Committee on Armed Services
                                   House of Representatives

                                   Dear Mr. Ortiz:

                                   The Department of Defense (DOD) is currently examining a core
                                   competency-based approach for making sourcing decisions—that is, the
                                   decision to use a public or private sector source to perform a necessary
                                   agency function or activity based on whether the function or activity is
                                   core to the agency’s mission.1 This is one of the business transformation
                                   initiatives that have been endorsed by one of DOD’s high-level
                                   management committees, the Senior Executive Council.2 It believes that
                                   the department should focus its energies and talents on those functions
                                   that are core or directly linked to its warfighting mission, and which must
                                   be performed by the agency, with the expectation that necessary products
                                   or services associated with non-core functions should be obtained from
                                   other government agencies or the private sector.

                                   In determining how to best perform non-core functions, DOD’s
                                   position is that its components should look beyond just the use of
                                   Office of Management and Budget (OMB) Circular A-76, with its focus
                                   on public-private competitions, in making sourcing decisions. It has
                                   expressed interest in examining the use of other alternatives, such
                                   as public-private partnering, transferring functions to other agencies,
                                   employee stock ownerships, and quasi-government corporations.
                                   Nevertheless, Circular A-76 remains an important tool for making
                                   sourcing decisions for non-inherently governmental functions typically


                                   1
                                       Throughout this report, we use the terms “activities” and “functions” interchangeably.
                                   2
                                    The Senior Executive Council is a high-level management committee established in 2001
                                   to (1) help guide efforts across the department to transform and improve the department’s
                                   business practices, and (2) to function as a board of directors for DOD. The Council is
                                   chaired by the Secretary of Defense and is comprised of the Deputy Secretary of Defense,
                                   the service secretaries, and the Under Secretary of Defense for Acquisition, Technology
                                   and Logistics.



                                   Page 1                                                     GAO-03-818 Defense Management
                   involving commercially available services. Also, A-76 competitive sourcing
                   is a major initiative under the President’s Management Agenda3 and OMB
                   has set ambitious goals for those competitions.

                   At your request, we examined DOD’s plans for sourcing non-core
                   functions and the effect this may have on its A-76 program. Accordingly,
                   we assessed (1) the department’s progress in assessing its core functions
                   as a basis for sourcing decisions, (2) the plans and progress DOD has
                   made in identifying and implementing alternatives to A-76, and (3) the
                   current status of DOD’s A-76 program.

                   In performing work for this review, we obtained and analyzed plans
                   available from DOD and its components for assessing non-core functions
                   and identifying alternate sourcing approaches, and reviewed relevant
                   documents from DOD agencies. We met with officials from the Office of
                   the Secretary of Defense, the Army, the Navy, the Air Force, the Marine
                   Corps, the Defense Logistics Agency, and other organizations to obtain
                   information on their sourcing programs and efforts to identify alternative
                   sourcing options. The A-76 data used in this report are derived from a
                   Web-based DOD commercial activities database; we did not validate
                   the information in this database. Further details on our scope and
                   methodology are included at the end of this report.


                   Progress in assessing core functions has been varied and limited across
Results in Brief   major Defense components4 and has been challenging. Multiple and
                   somewhat ambiguous definitions of what constitutes a core function
                   have made it difficult for the components to easily employ the core
                   competency-based approach to decision making. As a result, some
                   components have sought additional guidance and/or applied their
                   own criteria to identify core functions. Even then, much guidance



                   3
                    Executive Office of the President, Office of Management and Budget, The
                   President’s Management Agenda, Fiscal Year 2002. The report can be found at
                   www.whitehouse.gov/omb/budget. The President’s Management Agenda, announced
                   in the summer of 2001, is a strategy for improving the management of the federal
                   government. It focuses on five areas of management weakness across the government
                   where improvements and the most progress can be made. In addition to competitive
                   sourcing, the President’s Management Agenda includes an emphasis on strategic
                   management of human capital, improved financial performance, expanded electronic
                   government, and budget and performance integration.
                   4
                       Defense components refer to the military services and Defense agencies.




                   Page 2                                                   GAO-03-818 Defense Management
remained somewhat broad in nature and subjective, and will likely remain
so in the future. The Army has made the most progress to identify core and
non-core functions, having completed core competency determinations
for over 200,000 positions, but has had to deal with numerous appeals to
its initial core determinations. The Air Force has recently completed a
more limited effort, focusing predominately on military positions. As a
result of its core competency-based effort, the Air Force identified over
17,000 military positions and almost 9,000 civilian positions it believes
are non-core. The Navy and Marine Corps are in the early stages of
determining their core functions. The Defense Logistics Agency broadly
identified its core and non-core competencies, but has not identified
specific positions as core or non-core. Meanwhile, through its efforts to
operationalize the core competency-based approach, the Army discovered
that the utility of identifying core functions for the purpose of making
sourcing decisions can have its limitations. More specifically, contrary to
its original expectations, the Army found that distinguishing between core
and non-core functions may not, by itself, prescribe a sourcing decision.
Once it has been determined that a function is not core to an agency’s
mission, other factors that are not currently covered in DOD’s guidance
must also be considered, such as risk and operational considerations. As
a result, this creates some uncertainty regarding how and to what extent
the Army will use the results of the core analyses and potentially has
implications for other Defense components as well.

The magnitude of alternate sourcing arrangements that DOD will pursue
under the core competency-based approach is not yet clear, based on
limitations in core assessments conducted to date and due to legal and
other constraints that could impact use of alternate arrangements. Even
so, DOD has made some progress toward identifying and using some
sourcing arrangements that are alternatives to A-76, including some
identified as part of an initiative to identify alternatives through use of
pilot projects,5 and a few others that have been identified by the services
as they have focused on the core initiative. For example, in an effort
to stimulate consideration of alternatives, DOD tasked each of its
components with identifying at least one non-core competency pilot
project and developing plans to transition the affected functions out of
DOD using alternatives to A-76 competition. Six pilot projects have been
approved and are in varying stages of implementation. They range from
divestiture to partnering with municipalities for services, with the latter


5
    Officially referred to as pioneer projects.




Page 3                                            GAO-03-818 Defense Management
expected to be used as a model for more widespread implementation.
Beyond those six pilot projects, department officials told us about
two additional projects under way that would transfer certain functions
to other agencies. At the same time, various officials told us that
legislative restrictions—such as those that restrict outsourcing—and
OMB’s emphasis on competitive sourcing under A-76 could impact the
extent to which alternatives are used.

While the department continues to examine the potential for implementing
its core concept and alternative sourcing plans, it is also actively
maintaining an A-76 competitive sourcing program. This is largely due
to the emphasis on competitive sourcing in the President’s Management
Agenda and the A-76 goals set by OMB. Building on its ongoing A-76
program, DOD reported that as of June 1, 2003, it has met OMB’s
short-term goal to study 15 percent of the positions that the department
identified in its year 2000 commercial activities inventory by the end of
fiscal year 2003. Meeting the longer-term goal of studying at least
50 percent of its nearly 453,000 commercial activity positions6 through
fiscal year 2008 could present a challenge because the goal requires
studying far more positions—nearly double—than DOD has previously
studied under a comparable time period. If the history of DOD’s A-76
program is a guide, the department could face other challenges associated
with studying such sizeable numbers of positions. These challenges
include providing sufficient time and resources to complete the studies,
and encountering difficulties in identifying and grouping positions for
study. Another challenge to completing OMB’s A-76 goals involves the
defense components’ plans, particularly the Air Force, to convert a
sizeable number of military positions to performance by government
civilian or contractor personnel, either as a result of the core-competency
process or through A-76 studies. Although precise numbers are not
available for each of the components, the services have indicated they
plan to use such conversions to transfer the affected military personnel
and their slots to fill other priorities, rather than reduce authorized
military end-strength. To do so will require the services to reprioritize their
funding for operation and maintenance accounts, because it is from those




6
 This goal is based on DOD’s inventory of commercial activities reported in 2000; the
numbers vary by year.




Page 4                                                  GAO-03-818 Defense Management
             accounts the services must fund replacement civilian or contractor
             personnel.7

             This report contains recommendations for additional guidance in making
             sourcing decisions based on core assessments and to ensure conversion
             of functions from performance by military to civilian or contractor
             personnel are accompanied by identified sources of funding to support
             those decisions. In commenting on a draft of this report, the department
             generally concurred with our recommendations.


             Since 1955, the executive branch has encouraged federal agencies to
Background   obtain commercially available goods and services from the private sector
             when the agencies determined that such action was cost-effective. OMB
             formalized the policy in its Circular A-76, issued in 1966. In 1979, OMB
             supplemented the circular with a handbook that included procedures
             for competitively determining whether commercial activities should be
             performed in-house, by another federal agency through an Interservice
             Support Agreement, or by the private sector. OMB has updated this
             handbook three times since 1979. An extensive revision to Circular A-76
             was issued on May 29, 2003, based in part on the recent work of the
             congressionally mandated Commercial Activities Panel.8

             Under the newly revised circular, agencies may convert commercial
             activities to or from contractor performance through a public-private
             competition, whereby the estimated cost of public or private performance
             of the function is evaluated against published selection criteria in
             accordance with the principles and procedures outlined in the circular.9


             7
              The costs of military positions are funded through military personnel appropriation
             accounts, whereas costs associated with government civilian or contractor personnel are
             funded through operation and maintenance appropriation accounts.
             8
               The Panel, mandated by section 832 of the Defense Authorization Act for fiscal year 2001,
             required the Comptroller General to convene a panel of experts to study the process used
             by the federal government to make sourcing decisions. After a yearlong study, the Panel
             published its report in April 2002. See Commercial Activities Panel, Improving the
             Sourcing Decisions of the Government: Final Report, (Washington, D.C.: Apr. 30, 2002).
             The report can be found on GAO’s Web site at http://www.gao.gov under the Commercial
             Activities Panel heading.
             9
              The current revision to the circular replaces the use of direct conversion with a
             requirement to compete all non inherently governmental functions. In addition, the
             revised circular provides for a streamlined cost comparison for 65 or fewer civilian
             positions in addition to standard competitions.




             Page 5                                                   GAO-03-818 Defense Management
As part of this process, the government identifies the work to be
performed in a “performance work statement,” prepares an in-house offer
which includes its most efficient organization, and compares all the offers
against each other and the selection criteria. The revised circular provides
several alternative procedures for conducting source selections, only
one of which allow agencies to select a contract based on other than the
lowest cost technically acceptable offer.10 The four source selection
alternatives are: sealed bid, lowest price technically acceptable, phased
evaluation, and, in certain cases, trade-off (which permits agencies to
weigh cost and non-cost factors).

Administrative and legislative constraints from the late 1980s through
1995 resulted in a lull—and even a moratorium—on awarding contracts
resulting from A-76 competitions. In 1995, congressional and
administration initiatives placed more emphasis on A-76 as a means of
achieving greater economies and efficiencies in operations. Beginning
about 1995, DOD began to give renewed emphasis to the use of A-76
competitive sourcing under Circular A-76. More recently, competitive
sourcing has received governmentwide attention, as one of five initiatives
of the President’s Management Agenda for fiscal year 2002. DOD has been
a leader among federal agencies in using A-76 in recent years.

The revised circular requires agencies to prepare two annual inventories
that categorize all activities performed by government personnel as either
commercial or inherently governmental.11 A similar requirement was
included in the 1998 Federal Activities Inventory Reform (FAIR) Act,12
which directs agencies to develop annual inventories of their positions
that are not inherently governmental. DOD’s 2000 FAIR Act inventory
identified nearly 453,000 in-house civilian positions engaged in a variety
of commercial activities, nearly 260,000 of which have been, or are, subject


10
  DOD has submitted a legislative proposal for inclusion in the National Defense
Authorization Bill for Fiscal Year 2004, a request to eliminate the existing requirement
that the department base its competitive sourcing decisions on cost. This would allow
DOD to consider quality as well as cost when making sourcing decisions.
11
  OMB Circular A-76 defines an inherently governmental function as one that requires
either the exercise of substantial discretion in applying government authority or the
making of value judgments in making decisions for the government. Positions deemed
inherently governmental are not subject to the A-76 program.
12
  Section 5 of P.L. 105-270, 31 U.S.C. 501 note (1998), on the other hand, defines an
inherently governmental function as a “function that is so intimately related to the public
interest as to require performance by Federal Government employees.”




Page 6                                                   GAO-03-818 Defense Management
to competition or direct conversion under Circular A-76. The number
of positions subject to A-76 is less than the total number of positions in
commercial activities because DOD made adjustments to exclude certain
commercial activities from being considered eligible for competition;
they included such reasons as statutory, national security, or operational
considerations. Under the President’s Management Agenda, OMB has
directed agencies to directly convert or compete through cost comparison
studies 15 percent of their total fiscal year 2000 inventories of commercial
activities by the end of fiscal year 2003, with the ultimate goal of
competing at least 50 percent of their inventories by the end of fiscal
year 2008.

In providing guidance for determining whether activities and functions,
and associated positions are considered to be inherently governmental in
nature, DOD has sometimes equated the term “inherently governmental”
with the somewhat parallel term “core.”13 While use of the term “core” is
associated with the private sector, DOD has sometimes used the term to
designate military and civilian essential positions required for military and
national security reasons. The old A-76 Handbook provided yet another,
but similar, meaning for core. In the context of A-76, core capability was
defined as “a commercial activity operated by a cadre of highly skilled
employees, in a specialized technical or scientific development area to
ensure that a minimum capability is maintained.”

The concept of core in DOD has also been associated with legislative
requirements to establish core logistics capabilities in government-owned
military maintenance depots. This process is based on a requirement
contained in 10 U.S.C. 2464 to identify and maintain within government-
owned and –operated facilities a core logistics capability including the
equipment, personnel, and technical competence required to maintain
weapon systems identified as necessary for national defense emergencies
and contingencies. Regardless of usage, determinations of core and
inherently governmental functions within DOD have often been viewed as
somewhat subjective in nature.

The term “core function” recently has gained increased and more
expanded use within DOD, beginning with DOD’s publication of its
September 2001 Quadrennial Defense Review Report, which




13
     As noted in subsequent discussion, the terms are not always interchangeable.




Page 7                                                    GAO-03-818 Defense Management
recommended the identification of core and non-core functions.14
According to the report, “only those functions that must be performed
by DOD should be kept by DOD. Any function that can be provided by
the private sector is not a core government function.” The test to separate
core and non-core functions would be to determine whether a function is
directly necessary for warfighting, according to the report.

Further emphasis on assessing core functions subsequently came from
DOD’s Senior Executive Council,15 which, in April 2002, launched a
departmentwide effort to distinguish between core and non-core functions
with an emphasis on retaining in-house only those functions deemed core
to the warfighting mission. Under this approach, it tasked the defense
components with developing plans to transition non-core functions to
alternative sourcing arrangements or A-76 studies, if appropriate, as soon
as possible. In advocating the use of alternatives, the Senior Executive
Council noted that A-76 cost comparisons were lengthy, expensive, and
hard on the workforce. Examples of alternate sourcing strategies cited by
the Council included public-private partnering, employee stock ownership,
and quasi-governmental organizations. Details about these and other
alternatives can be found at appendix I. While use of A-76 studies was still
permitted, emphasis was expected to be given to identifying alternate
sourcing approaches that might be used to transfer non-core functions out
of the department.

Much publicity to this new core emphasis surrounded Army’s efforts
under its program, which it designated as “the Third Wave.” The term
“Third Wave” was used to distinguish this current effort from two previous
sourcing efforts under A-76, the first occurring largely in the 1980s and
the second beginning in the 1996-97 time period. Unlike the earlier two
waves, which focused on A-76 studies of about 25,000 and 33,000 positions
respectively, the scope of the Third Wave was to be significantly larger,
potentially involving over 200,000 positions. This was of significant
concern to government employees after several years of A-76 study efforts
within DOD. The Army’s program also received much public attention


14
     U.S. Department of Defense, Quadrennial Defense Review Report (Sept. 30, 2001).
15
  The Senior Executive Council is a high-level management committee established in 2001
to (1) help guide efforts across the department to transform and improve the department’s
business practices, and (2) to function as a board of directors for DOD. The Council is
chaired by the Secretary of Defense and is comprised of the Deputy Secretary of Defense,
the service secretaries, and the Under Secretary of Defense for Acquisition, Technology
and Logistics.




Page 8                                                  GAO-03-818 Defense Management
                          because of what Army officials have characterized as an unrelated, but
                          parallel, effort to have a contractor (RAND) study options for rethinking
                          governance of the Army’s arsenals and manufacturing plants.16 The Army
                          has subsequently indicated it does not plan to pursue the options outlined
                          in that study which ranged from privatization to creation of a federal
                          government corporation to operate these facilities. On March 24, 2003,
                          the Secretary of the Army directed that other action plans be developed
                          to deal with these facilities. (See app. II for a summary of the actions
                          directed.)


                          Progress in assessing core functions has been varied and limited across
Progress in Assessing     the major Defense components, and affected by somewhat ambiguous and
Core Functions Has        subjective definitions of what constitutes a “core function.” These multiple
                          and somewhat ambiguous definitions of what is a “core function” have
Varied Across the         made it difficult for the components to easily employ the core competency
Defense Components        approach to decision-making, and some DOD components have sought
                          additional guidance and/or applied their own criteria to identify core
and Has Been              functions. Even so, progress in assessing core functions has varied
Affected Somewhat         across the components, with the Army and the Air Force having made
by Definitions            the most progress in their efforts. In addition, the Army, which has
                          devoted the greatest attention to assessing core functions, has found that
of “Core”                 distinguishing between core and non-core functions, by itself, has limited
                          value because that distinction alone does not necessarily prescribe a
                          sourcing decision.


Guidance in Defining      DOD guidance to define a core function under the new program
Core Has Been Broad       emphasis has been broad and, as a result, there are multiple and somewhat
and Additional Guidance   ambiguous definitions of “core,” leading some DOD components to seek
                          additional guidance. The term “core” has had different meanings
Sought                    depending upon the context in which it was used. Moreover, there has
                          been and remains a significant amount of subjectivity in defining “core” as
                          there has been with the term “inherently governmental.” Recognizing the
                          potential difficulty in applying the core competency-based approach, the
                          Senior Executive Council provided several definitions of “core” as well as
                          criteria for determining core competencies in its April 2002
                          implementing memo.



                          16
                            William M. Hix et al., Rethinking Governance of the Army’s Arsenals and Ammunition
                          Plants, RAND (Santa Monica, Calif., 2003).




                          Page 9                                              GAO-03-818 Defense Management
    As a starting point for its core-competency emphasis, a work group
    commissioned by the Senior Executive Council chose a business concept
    outlined in a 1990 Harvard Business Review article.17 The article provides
    several examples of corporations that identified their core competencies,
    helping them to become more successful than their competitors. The
    authors likened a diversified corporation to a business tree. For example,
    the trunk and major limbs are core products; the smaller branches are
    business units. While admitting this concept is difficult to apply to DOD,
    the Senior Executive Council nonetheless translated that business tree to
    a military application—the core services were described as the set of
    activities that actually contribute to the value of the end product (land,
    sea, and air operations), the business units were the units of a component
    command, the end products were military effects, and the customer was
    the combatant commander employing forces and resources.

    In adapting the definition of “core” from the Harvard Business Review
    article to the DOD environment, the Senior Executive Council defined
    core as “A complex harmonization of individual technologies and
    ‘production’ (employment, delivery) skills that create unique military
    capabilities valued by the force employing [commander in chief]!” Several
    additional definitions were provided in the Council’s April 2002 memo to
    help clarify the reader’s understanding of the definition (see app. III).
    According to the memo, however, there are three themes common to each
    definition: (1) the knowledge and experience acquired by people, (2) the
    discrete and finite set of technologies the people employ, and (3) the
    business objectives to be achieved. It stated that DOD’s business objective
    to be achieved is warfare.

    The Senior Executive Council’s memo also provided some criteria for
    determining core competencies. According to the Council, a core
    competency

•   has potential application to a wide variety of national security needs,
•   provides a significant contribution to the combatant commander’s
    desired effect,
•   would be difficult for competitors to imitate,
•   provides the means to differentiate from competitors,
•   crosses organizational boundaries within an enterprise,



    17
     C.K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard
    Business Review, May-June 1990.




    Page 10                                            GAO-03-818 Defense Management
•   is a direct contributor to the perceived value of the service,
•   does not diminish with use,
•   deploys with forces, and
•   provides training and experience that forms the basis of ethos and culture.

    The memo also noted that these criteria are not “pass/fail” criteria. That is,
    some criteria may help to identify core competencies while others may
    not, and that these criteria are based on business concepts that have
    been adapted to the military domain. Furthermore, the memo stressed
    the importance of senior leadership judgment in identifying core
    competencies.

    According to various officials, the lack of a clear and concise definition of
    the terms related to the core concept initially made it difficult for the Army
    and Air Force to apply the core concept to their functions. Both services
    have subsequently supplemented the Senior Executive Council definitions
    with their own internal documents and specific guidance, which are
    discussed in the next sections.18 That notwithstanding, the definition of
    core remains somewhat broad in nature and subjective, and will likely
    remain so in the future. The Navy and Marine Corps have only recently
    begun their efforts to identify core functions, and have not yet sought to
    develop additional guidance. A Defense Logistics Agency official told us
    they did not use any additional guidance.

    DOD and service officials told us that while the concepts “inherently
    governmental” and “core” are similar and may overlap, they may not
    always be the same. Specifically, not all inherently governmental functions
    would be considered core, nor would all core functions be designated
    inherently governmental. For example, according to Army analysis,
    many civil functions performed by the Army Corps of Engineers, such
    as wetlands regulation and eminent domain authority, are inherently
    governmental, but they are not core to the Army’s mission. Conversely, we
    were told, certain medical services provided by doctors and nurses in the
    operating forces are not deemed to be inherently governmental; however,
    these services are considered to be core to the Army’s mission.




    18
      For example, the Army used its Field Manual No. 1, The Army, to provide additional
    guidance. The Army describes this as its capstone doctrinal manual, which, among other
    things, delineates the Army’s purpose, roles, and functions.




    Page 11                                               GAO-03-818 Defense Management
Progress on Identifying     The Senior Executive Council directed the services and defense agencies
Core Functions Has Varied   to inventory their organizations and identify their core functions, but only
                            the Army and Air Force have made much progress in doing so. The Army
                            took the lead in pursuing this initiative and has recently completed an
                            effort to identify its core and non-core functions. The Air Force also
                            initiated a core competency review, which focused predominately on
                            military positions. The Navy and Marine Corps are in the early stages of
                            assessing their core functions. The Defense Logistics Agency broadly
                            identified its core and non-core competencies, but has not identified
                            specific positions as core or non-core.

Army Efforts Recently       The Army has recently completed an effort to identify its core and
Completed                   non-core functions for over 200,000 positions. Initially, the Army’s Third
                            Wave program assumed that all commercial positions were non-core and
                            thus potential candidates for performance by the private sector or other
                            government agencies. However, it permitted its components to request
                            exemption from the non-core designation and, as a result, considered
                            appeals involving numerous functional areas. Some were sustained while
                            others were not. The results of this process differed somewhat from the
                            Army’s initial expectations that all non-core functions could be subject to
                            competition or alternate sourcing, and the number of positions likely to be
                            subject to alternate sourcing is not yet clear.

                            In permitting its components to present a case for functions to be exempt
                            from the non-core designation, the Army provided specific guidance on the
                            submission of exemption requests and the factors to be used to evaluate
                            those requests. An exemption request needed to provide a compelling case
                            that a non-core designation could pose substantial and specific risks to
                            core warfighting missions or would violate a statutory requirement
                            affecting a function. The Army components submitted 24 requests for
                            exemption from non-core designation, each representing one or more
                            broad functional areas. For example, these areas included civilian
                            personnel, installation management, law enforcement and criminal
                            investigations, and both military and civilian career progression activities.




                            Page 12                                        GAO-03-818 Defense Management
    The Army’s authority for reviewing and approving core-competency
    exemption requests was the Assistant Secretary of the Army for Manpower
    and Reserve Affairs. In evaluating the exemption requests, the Office of
    Manpower and Reserve Affairs supplemented the Senior Executive
    Council’s definitions of core with six core competencies identified by the
    Army in Army Field Manual 1 and other documents. The six competencies
    were depicted as:

•   Shape the security environment—provide a military presence.
•   Prompt response—provide a broad range of land power options to shape
    the security environment and respond to natural or manmade crises
    worldwide.
•   Forcible entry operations—provide access to contested areas worldwide.
•   Mobilize the Army—provide the means to confront unforeseen challenges
    and ensure America’s security.
•   Sustained land dominance—provide capabilities to control land and
    people across various types of conflicts.
•   Support civil authorities—provide support to civil authorities in domestic
    and international contingencies, including homeland security.

    After evaluating the appeals, the Army, in some instances, sustained the
    exemption requests, while, in other instances, they were denied. However,
    in many instances a mixed decision was rendered regarding individual
    functions within a broad functional area. This is illustrated by the Army’s
    determination of core competencies for two functions—medical services
    and information resources.

    In making its decisions, Army officials determined that medical activities
    could be considered core in some circumstances and non-core in others.
    The Army also found that, in some cases, functions considered to be
    core—such as information resources—contained elements that were
    designated non-core.

    The Army determined that many medical functions are core to the Army’s
    mission even though they are not classified as inherently governmental.
    The Army recognizes that medical functions do not require unique military
    knowledge or skills or recent experience in the operating forces to be
    performed. However, for troops deployed in theater (i.e., a war zone),
    medical functions do need to be performed by in-house personnel because
    reliance on host nation contracting for medical support could place
    significant risks on the Army forces. The Army has determined that the
    in-theater medical mission is a critical element of the Army’s ability to
    accomplish its core competencies. Even so, certain functions within the



    Page 13                                       GAO-03-818 Defense Management
medical area can be considered both core and non-core. For example,
the optical fabrication function—which is the ability to produce eyewear
(replacement spectacles and protective mask inserts)—is considered a
core competency in support of the operational forces close to the point of
need in the area of engagement. However, this same function performed in
the United States is not considered to be a core competency, and the Army
states that this function may be reviewed for divestiture or privatization.

Within the information resources function, the Army considers the
management of information resources in a network-centric, knowledge-
based workforce to be a core warfighting competency. This core
competency includes information operations that support operating
forces, and utilizes commercial technology adapted for military
applications. Organizations and personnel performing functions that
ensure command, control, and communications interoperability across
Army, joint, interagency, and coalition forces are core functions and need
to be kept in-house. However, other information resource functions—such
as help-desk services—are deemed to be non-core and can be considered
for possible outsourcing.

Army officials said they recognized that once the determination was
made that a function was considered to be core or non-core to the Army’s
mission, the sourcing of the function would, in many instances, require
additional analysis to determine the amount of core capability to be kept
in-house and the risk the Army might face by sourcing the function. The
types of risk to be considered in evaluating impacts upon a core mission
are force management, operational, future challenges, and institutional.19
Additional factors must also be considered. For example, the Army
determined that its casualty and mortuary affairs function is not a core
mission, nor is it an inherently governmental function. However, national
policy dictates that Army officials notify families of a casualty in person.

Overall, the Army found the results of its review were somewhat contrary
to its, and the Senior Executive Council’s, initial expectation that all


19
  Force management risk includes the ability to recruit, retain, train, and equip sufficient
numbers of quality personnel and sustain the readiness of the force while accomplishing its
many operations tasks. Operational risk concerns the ability to achieve military objectives
in a near-term conflict or other contingency. Future challenges risk involves the ability to
invest in new capabilities and develop new operational concepts needed to dissuade or
defeat mid- to long-term military challenges. Institutional risk entails the ability to develop
management practices and controls that use resources efficiently and promote the effective
operation of the Defense establishment.




Page 14                                                   GAO-03-818 Defense Management
                                 non-core functions should be subject to competition or alternative
                                 sourcing. As noted previously, the Army found the designation of “core”
                                 does not necessarily indicate military or government civilian performance
                                 is required or necessarily precludes competitive sourcing of the function.
                                 That is, a designation of “non-core” does not automatically mean that a
                                 function can, or should, be contracted out—other factors must also be
                                 considered. As a result, this has led to some uncertainty regarding how
                                 and to what extent the results of the Army’s core analyses will be used in
                                 sourcing decisions and this potentially has implications for other Defense
                                 components as well. While at this point, the Army is still deciding how to
                                 proceed with implementing the results of its core assessments, Army
                                 officials told us that the core decisions would be reflected in the Army’s
                                 2003 FAIR Act inventory.

Air Force Efforts Focus on       The Air Force focused its initial core competency review predominately
Military Positions               on military positions. This was done because the Air Force wanted to
                                 identify functions performed by military personnel that might be
                                 realigned for civilian or contractor performance, thus permitting affected
                                 military personnel to be reassigned to operational areas where shortages
                                 of military personnel existed. All military positions were reviewed in
                                 terms of three main core competencies and six distinctive capabilities.
                                 The three institutional core competencies were depicted as:

                             •   Developing Airmen (the heart of combat capability).
                             •   Technology to Warfighting (the tools of combat capability).
                             •   Integrating Operations (maximizing combat capability).

                                 Six distinctive Air Force capabilities also considered were those related to:

                             •   Precision engagement—the ability to locate the objective or target,
                                 provide responsive command and control, generate the desired effect,
                                 assess the level of success, and retain the flexibility to reengage.
                             •   Rapid global mobility—the ability to rapidly and flexibly respond to the
                                 full spectrum of contingencies worldwide.
                             •   Information superiority—the ability to collect, control, exploit and defend
                                 information while denying the adversary the same.
                             •   Agile combat support—the ability to provide combat support in a
                                 responsive, deployable, and sustainable manner.
                             •   Air and space superiority—the ability to establish control over the entirety
                                 of air and space, providing freedom from attack and freedom to attack.
                             •   Global attack—the ability to find, fix, and attack targets anywhere on the
                                 globe.




                                 Page 15                                        GAO-03-818 Defense Management
Although the core competency review process did involve some subjective
judgment, each position was classified into three basic categories—those
(1) requiring military performance, (2) requiring government civilian
performance, and (3) available for contractor consideration. As a result
of this review, 17,800 military positions were identified for potential
conversion to either government civilian or contractor civilian positions.
Our prior work has identified various instances where personnel costs are
generally less for civilian personnel than for military.20 An additional
4,477 military positions were identified for possible future realignment
through other reengineering efforts, such as adjusting the manpower
requirements process and conducting a business case analysis for
alternative installation support practices, for a total of 22,277 military
positions. Because many of the functions reviewed involved both military
and civilian personnel, an additional 8,900 Air Force civilian positions
were identified for possible conversion to contractor performance. An Air
Force official stated that the service hopes to do a more in-depth review
on the civilian side in the future; however, at the moment, none is planned.
The Air Force expects the number of positions that can be competed in its
FAIR Act inventory will be increased as a result of this review.

In the near-term, as a direct result of the core function review, the
Air Force has indicated it plans to outsource a significant portion of
the workload of its Pentagon Communications Agency currently
performed by over 400 military personnel. Although Air Force officials
indicated the service has the resources to implement this action, other
efforts may have to be postponed until the funds are available. To
move military positions to operational warfighting positions, additional
government civilian or contractor personnel would be needed to replace
the military personnel. Air Force officials told us that moving the military
personnel out of non-core functions is a high priority, but because of the
high cost involved in adding funds to the operations and maintenance
appropriation account to pay for replacement civilian or contractor




20
  See U.S. General Accounting Office, Base Operations: Challenges Confronting
DOD as It Renews Emphasis on Outsourcing, GAO/NSIAD-97-86 (Washington, D.C.:
Mar. 11, 1997); DOD Force Mix Issues: Converting Some Support Officer Positions to
Civilian Status Could Save Money, GAO/NSIAD-97-15 (Washington, D.C.: Oct. 23, 1996);
and DOD Force Mix Issues: Greater Reliance on Civilians in Support Roles Could
Provide Significant Benefits, GAO/NSIAD-95-5 (Washington, D.C.: Oct. 19, 1994.)




Page 16                                              GAO-03-818 Defense Management
                              positions, it is currently an unfunded priority.21 They recently estimated
                              this additional cost to be about $5 billion over the next 5 years. Moreover,
                              in its internal budget planning documents for fiscal year 2004, the
                              Air Force stated that its number one unfunded priority is funding
                              ($2.34 billion) for moving the initial 6,300 military positions out of
                              non-core functions. As a result, it is not yet clear to what extent larger
                              number of conversions would take place and the extent to which they
                              might involve direct conversions or be done as part of public-private
                              competitions using the A-76 process.

Other DOD Component Efforts   As mentioned earlier, the Marine Corps has recently begun its effort to
Are Not as Advanced           identify core functions and has convened a working group to determine
                              how to proceed. The Secretary of the Navy tasked the Navy components
                              to determine their core competencies on April 18, 2003, so this effort is
                              still in its infancy. The Defense Logistics Agency has identified four
                              core competencies—customer knowledge, integrated combat logistics
                              solutions, rapid worldwide response, and single face to industry and
                              customers. In addition, it identified 10 non-core competencies. These are:
                              base operations; warehousing services; transportation services; document
                              automation, printing and production services; marketing of unneeded
                              materiel; computer application software; computer operations and
                              database management support; cataloging; payroll services; and civilian
                              personnel services. However, it has not determined which positions are
                              considered to be core.




                              21
                                Military positions are funded out of the Military Personnel Appropriation accounts. With
                              military personnel being shifted to other positions, this does not free up funds that could be
                              used to increase funding for replacement personnel in the Operations and Maintenance
                              Appropriation accounts.




                              Page 17                                                  GAO-03-818 Defense Management
                         The range of alternatives to A-76 likely to be pursued under the core
Some Progress            competency-based approach is not yet clear given limitations in the core
Made in Identifying      analyses, but DOD has made some progress toward identifying and/or
                         using some sourcing arrangements that are alternatives to A-76. Some
Alternative Sourcing     were identified as part of an initiative to identify alternatives through the
Arrangements, but        use of pilot projects, and a few others have been identified by the services
                         as they have focused on the core initiative. At the same time, some DOD
the Extent to Which      officials indicated that the use of some alternatives could be limited
Alternatives Are         without special legislative authorities and/or repeal of various existing
Likely to Be Used        prohibitions. The use of alternative sourcing could also be affected by the
                         emphasis on A-76 competitions and OMB’s goals for the department.
Is Unclear
Alternate Sourcing       DOD has made some progress in identifying and using sourcing
Approaches Identified    arrangements that are alternatives to A-76, including some as part of an
through Pilot Projects   initiative to identify alternatives through use of pilot projects, and a few
                         others that have been identified by the services as they have focused on
and Other Initiatives    the core initiative. These projects are in various stages of implementation.

                         DOD’s Senior Executive Council and Business Initiative Council22
                         asked the components to identify and submit at least one pilot or
                         “pioneer” project to provide alternative sourcing methods for widespread
                         implementation. Ten projects were approved by the Business Initiative
                         Council and were then submitted to OMB for approval. OMB approved
                         eight projects in August 2002. The department later withdrew two projects
                         because the timing was not appropriate. The following table provides a
                         listing of the 10 Pioneer Projects. (A description of the ongoing pioneer
                         projects can be found in app. IV.)




                         22
                           The Business Initiative Council, an organization that reports directly to the Senior
                         Executive Council, was established in 2001 to encourage the military services to
                         explore new money-saving business practices to help offset funding requirements for
                         transformation and other high-priority efforts. It is headed by the Under Secretary of
                         Defense for Acquisition, Technology and Logistics, and its membership consists of the
                         service secretaries, the Vice Chairman of the Joint Chiefs of Staff, the Under Secretary of
                         Defense (Comptroller), and the Under Secretary of Defense for Personnel and Readiness.




                         Page 18                                                  GAO-03-818 Defense Management
Table 1: Pioneer Projects Submitted to OMB

                                                   Proposed sourcing            Approved by        Disapproved by        Withdrawn by
 Title                                             method                          OMB                  OMB                  DOD
 Reengineer existing information technology        Streamlined A-76                  x
 structure
 Metalworking machinery repair/rebuild             Waiver to A-76                      x
 services
 Desk top management services                      New requirement                     x
 Groundbreaker II (information technology          New requirement                                                              x
 support)
 Municipal services partnership for base           Direct service contract             x
 support                                           (legislation required)

 Randolph Air Force Base MEO (Most Efficient Reengineering                                                 x
 Organization) developed with an A-76
 competition to follow at a later date
 Revitalize and reshape the workforce        Reengineering                                                 x
 Ophthalmic services                         Divestiture                               x
 Brooks city-base partnership                Divestiture                               x
 White House Communication Agency military Military conversion                                                                  x
 manpower
Source: DOD.



                                              The projects propose to use a variety of alternatives, including partnering
                                              and divestiture, and are in varying stages of implementation, as noted in
                                              appendix IV. For example, the Army previously developed a partnership
                                              with the city of Monterey, California, to provide municipal services
                                              needed for the operation of DOD assets in Monterey County. Because of
                                              the success of this project, the Army submitted legislation to Congress
                                              that would allow contracting for municipal services defense-wide.23 In
                                              another example, the Navy has identified optical (eyewear) fabrication
                                              as a potential candidate for divestiture, because that service is readily
                                              available in the private sector. However, this project is still in the
                                              conceptual phase and no decision will be made until a thorough analysis
                                              has been completed to determine the most appropriate sourcing method.

                                              DOD was required to go to OMB for approval of these Pioneer Projects to
                                              determine if they would count toward the competitive sourcing goals set
                                              by OMB. The criteria for OMB approval required that projects involve an


                                              23
                                                This legislative request was included as part of the department’s request for
                                              legislation submitted to Congress for consideration as part of the fiscal year 2004 Defense
                                              Authorization bill. As of May 2003, this proposal was not included in either the House or
                                              Senate approved versions of the bill.




                                              Page 19                                                  GAO-03-818 Defense Management
element of divestiture, competition, or the transfer of responsibility to
other private or public sector performers. The two pilot Pioneer Projects
that were not approved by OMB had proposed using reengineering or
the development of most efficient organizations as an alternative to A-76
competition. These two projects were not approved because they neither
involved the divestiture of responsibility for performing the function nor
contained a near-term element of competition. DOD officials withdrew
two others because they believed timing was not appropriate for those
actions.

In responding to OMB’s draft of its most recent revision to Circular A-76,24
we stressed the importance of considering alternative approaches to
accomplishing agency missions. Such approaches encompass a wide range
of options, including restructuring, privatizing, transferring functions to
state and local governments, terminating obsolete functions, and creating
public-private partnerships. Given that these options can result in
improved efficiency and enhanced performance, we recommended at
that time that OMB continue to encourage agencies to consider these
and other alternatives to A-76 competition. The revised circular allows
agencies to deviate from certain requirements of the circular with prior
written approval from OMB. For example, agencies are permitted to
explore innovative alternatives, including public-private partnerships,
public-public partnerships, and high performing organizations, with prior
written approval from OMB for a specific competition.

In addition to these Pioneer Projects, some other initiatives to use an
alternate sourcing approach have emerged within the military services.
For example, the department plans to transfer its personnel security
investigations function, now performed by the Defense Security Service
to the Office of Personnel Management. In another instance, the Secretary
of the Army recently determined that the long-term incarceration of
prisoners was not a core competency of the Army. The department is in
the process of finalizing plans for transferring its military-dedicated prison
at Fort Leavenworth, Kansas,25 to the Federal Bureau of Prisons. Although
exact savings from this transfer have not yet been determined, an Army
official stated that transferring the facility to the Bureau of Prisons would


24
 U.S. General Accounting Office, Proposed Revisions to OMB Circular A-76,
GAO-03-391R (Washington, D.C.: Jan. 16, 2003).
25
  This prison houses level III prisoners from each of the military services. This level
has been defined as those prisoners with a sentence of 7 years or more.




Page 20                                                   GAO-03-818 Defense Management
                            free up almost 500 military positions. In addition, Army officials believe it
                            will allow for efficiency gains because the cost to incarcerate a prisoner
                            per year by the Bureau of Prisons is expected to be less than half what it
                            costs the Army to do so.


Potential Limitations on    The services have been charged by the Senior Executive Council to
Use of Alternatives Exist   identify and use sourcing arrangement alternatives to A-76 for their
                            non-core functions; however, DOD and the services have encountered
                            potential limitations to their efforts. These include legislative impediments
                            and the requirement to support the President’s Management Agenda to
                            meet the competitive sourcing goals of OMB.

Legislation Can Limit Use   Various officials in the Office of the Secretary of Defense and the
of Alternatives             services expressed uncertainty over the extent to which existing
                            legislative prohibitions or the lack of legislative authority could limit the
                            pursuit of some alternatives. They noted existing prohibitions such as
                            those contained in 10 U.S.C. § 2461,26 and section 801427 of the annual
                            appropriations acts that require public-private competition in all but a
                            few circumstances. In citing areas where legislation might be needed, they
                            noted that to complete the planned transfer of the personnel security
                            investigative functions to the Office of Personnel Management, DOD
                            recently submitted a legislative request to Congress seeking authority to
                            do so as part of its legislative package known as the Defense
                            Transformation for the 21st Century Act of 2003. Specifically, the
                            legislation would allow DOD to transfer this non-core function to the
                            Office of Personnel Management, which would allow for consolidation of
                            requests for security clearances under this agency. Alternatively, Army
                            officials told us that in the initiative to transfer its Fort Leavenworth
                            prison to the Federal Bureau of Prisons, they did not believe special
                            authorizing legislation is required. They believe DOD is not required, by




                            26
                              Section 2461 requires, among other things, that before any commercial or industrial type
                            function that as of October 1, 1980, was being performed by DOD civilian employees is
                            changed to private sector performance, DOD must report to the Congress, conduct an
                            analysis showing that private-sector performance will result in a savings to the government
                            over the life of the contract, and certify that the analysis is available for examination.
                            27
                              This provision requires that DOD certify its most efficient and cost-effective organization
                            analysis to congressional committees before converting any activity performed by more
                            than 10 DOD civilian employees to contractor performance.



                            Page 21                                                  GAO-03-818 Defense Management
                             statute,28 to maintain prisoners in DOD facilities and may use any facility
                             under the control of the U.S. government.

                             DOD officials have also requested some legislative relief to implement
                             some initiatives that they have already identified. For example, DOD
                             has requested the repeal of 10 U.S.C. § 246529 to allow the department
                             to bid and compete contracts for security guard services and for the
                             performance of firefighting functions at military installations in the
                             continental United States.30 DOD believes such contracts would be
                             cost-effective and provide a needed flexibility in exigent situations,
                             such as September 11, 2001. In another case, DOD has sought legislative
                             authority to contract directly with local governments for municipal
                             services based on the success of its Pioneer Project in Monterey,
                             California. Doing so would allow DOD components to use this type of
                             arrangement at other locations, as appropriate.

Supporting the President’s   The department, in attempting to meet OMB’s goals to conduct A-76
Management Agenda May        competitions, is unlikely to pursue alternative sourcing on a large scale.
Limit Use of Alternatives    One of the five governmentwide initiatives in the President’s Management
                             Agenda is competitive sourcing. Under this initiative, OMB has directed
                             agencies to compete 15 percent of positions deemed commercial in their
                             fiscal year 2000 FAIR Act inventories by the end of fiscal year 2003, with
                             the ultimate goal of 50 percent by the end of fiscal year 2008. For DOD,
                             this represents approximately 226,000 positions. Although OMB has
                             recently allowed some alternative sourcing methods that contain an
                             element of competition to be counted toward meeting these goals, DOD
                             expects that the vast majority of positions will be competed under A-76


                             28
                               10 U.S.C. § 858 (Sentences of confinement adjudged by a court-martial may be carried
                             into execution in any facility under control of the United States). 10 U.S.C. § 951 (The
                             military may but is not required to provide for the establishment of correctional facilities).
                             29
                               Also included in the Defense Transformation for the 21st Century Act of 2003. Generally,
                             10 U.S.C. § 2465 prohibits DOD from contracting for firefighters and security guards except
                             when (1) the contract is to be performed overseas, (2) when the contract is to be
                             performed on government-owned but privately operated installations, or (3) when the
                             contract (or renewal of the contract) is for the performance of a function already under
                             contract as of September 24, 1983. In addition, there is temporary exception for contracts
                             for security services with local governments with respect to closing bases.
                             30
                               We have previously reported that the best way to determine if savings can be achieved
                             from contracting firefighter and security guard services is by completing an A-76 study
                             at each base where these services are being considered for conversion to contract. See
                             U.S. General Accounting Office, Base Operations: Contracting for Firefighters and
                             Security Guards, GAO/NSIAD-97-200BR (Washington, D.C.: Sept. 12, 1997).




                             Page 22                                                   GAO-03-818 Defense Management
                         competitions. Positions competed under A-76, of course, would not be
                         available for consideration for alternative sourcing methods.

                         While the department initially placed a priority on identifying alternative
                         sourcing arrangements, the most recent department guidance is less
                         clear regarding the priority of alternate sourcing arrangements over
                         A-76 competitions. The Business Initiative Council recently directed
                         the defense components to submit the status of their core competency
                         reviews and detailed competitive sourcing plans—including both A-76
                         and alternatives to A-76—by June 2, 2003. The Business Executive Council
                         will review these plans in preparation for the fiscal 2005-2009 preliminary
                         budget review. Details on these plans were not available at the time we
                         completed our review.


                         Limited progress in implementing the core competency-based approach,
DOD Expected to          coupled with OMB’s emphasis on the use of A-76 in conjunction with the
Maintain an Active       President’s Management Agenda, suggest that the use of A-76 may remain
                         a key vehicle for sourcing decisions involving non-core and non-inherently
A-76 Competitive         governmental functions. Nonetheless, despite its experience in
Sourcing Program         implementing competitive sourcing, the department faces a number of
                         challenges related to its A-76 program.


OMB Has Established      OMB has established ambitious A-76 competitive sourcing program goals
Ambitious A-76 Program   for the department to meet in both the short term and the long term, even
Goals for DOD            while DOD is focusing on its core competency approach. The department’s
                         A-76 goals for the number of positions to be studied and the time frames
                         for accomplishing those studies have varied over time, reaching a high in
                         1999 of studying 229,000 positions between 1997 and 2005. However,
                         DOD experienced difficulty in identifying eligible functions for study and
                         consequently, in 2001, reduced the goal to study 160,000 positions between
                         1997 and 2007. Recently, DOD’s study goals have increased because of
                         OMB’s competitive sourcing goals. To meet OMB’s goal of directly
                         converting or studying 15 percent of the 453,000 commercial activity
                         positions identified in the 2000 FAIR Act inventories by the end of fiscal
                         year 2003, DOD would need to complete A-76 studies on about
                         68,000 positions between fiscal year 2000 and the end of fiscal year 2003.31
                         Then, to meet the larger goal of 50 percent, DOD would need to study an


                         31
                              As of June 1, 2003, DOD reported that it has met OMB’s 15-percent goal.




                         Page 23                                                   GAO-03-818 Defense Management
additional 158,000 positions in the out years (fiscal years 2004-08). This
represents a total of 226,000 positions to be studied, far more than DOD
has been able to complete in a similar time period. Figure 1 illustrates
OMB’s goals for DOD compared to what DOD has completed at the end of
fiscal year 2002.

Figure 1: DOD’s A-76 Positions Completed and OMB’s Goal, Fiscal Years 1997-2008




The strength of DOD’s A-76 program is shown in the number of positions
announced or planned for study, those completed, and those still ongoing.
Table 2 provides data on the number of positions the department has
announced for study under its A-76 program since its resurgence in 1997.

Table 2: DOD Positions Announced for Study under A-76, by Component,
Fiscal Years 1997-2002

                                                             Fiscal year
 Component                        1997          1998          1999     2000             2001    2002      Total
 Army                           10,878        14,430         8,757       381              517     426    35,389
 Navy                           11,460        10,415        10,470     6,445            5,273   2,516    46,579
 Air Force                       5,674         8,442         8,161     4,124            1,553     904    28,858
 Marine Corps                        0             0         4,324       704                0      13     5,041
 Defense agencies                  978         2,220         3,953       533              528   3,442    11,654
 Total                          28,990        35,507        35,665 12,187               7,871   7,301   127,521
Source: DOD’s Commercial Activities Management Information System (CAMIS) as of April 2003.



The number of positions planned for study by year for each component for
fiscal years 2003-08 was not available, but it would seem to require much
greater numbers of announcements per year than were made in recent
years. The services are currently determining the number of positions they
plan to study in future years, including the number of military and civilian



Page 24                                                                      GAO-03-818 Defense Management
positions to be studied, and are required to submit preliminary data to the
Office of the Secretary of Defense by June 2, 2003. However, as noted, the
total number of positions that would be required to be studied for fiscal
years 2004-08 to meet OMB’s target for DOD is a total of 158,000 positions.

Table 3 shows the number of positions completed in A-76 studies since
1997. Of the total, 48,921 were civilian positions and 19,336 were
military positions.

Table 3: Number of Positions for Which A-76 Studies Have Been Completed,
by Component, Fiscal Years 1997-2002

                                                               Fiscal year
 Component                        1997          1998          1999      2000                2001     2002    Total
 Army                                26           129           691     1,538              7,534   10,423   20,341
 Navy                                82           234         2,936     4,214              5,323    2,382   15,171
 Air Force                        1,838         3,930         2,993     5,915              6,352    4,450   25,478
 Marine Corps                         0             0             0        41                551    1,214    1,806
 Defense agencies                   306           894           361     1,400              1,008    1,492    5,461
 Total                            2,252         5,187         6,981 13,108                20,768   19,961   68,257
Source: DOD Commercial Activities Management Information System data, as of March 2003.



Table 4 shows the number of positions being reviewed in ongoing A-76
studies. Of the total, 23,766 are civilian positions and the remaining 2,622
are military positions.

Table 4: Number of Positions for Which A-76 Studies Are Ongoing, by Component
and Year When Study Was Announced, Fiscal Years 1999-2003

                                                              Fiscal year
 Component                           1999            2000          2001                2002        2003      Total
 Army                               1,605              368           277                417            0     2,667
 Navy                               2,353            4,622        4,118               2,509           92    13,694
 Air Force                          1,241              264           321                876          156     2,858
 Marine Corps                          45              489             0                 13        1,041     1,588
 Defense agencies                   1,448              506        3,046                 581            0     5,581
 Total                              6,692            6,249        7,762               4,396        1,289    26,388
Source: DOD Commercial Activities Management Information System data, as of April 2003.



As shown in table 3 above, DOD had already studied over 68,000 positions
through fiscal year 2002, although OMB did not count approximately
14,000 positions contained in A-76 studies completed during fiscal years
1997-99 toward the 15-percent goal because the positions studied were



Page 25                                                                       GAO-03-818 Defense Management
                             not derived from DOD’s 2000 FAIR Act inventory. Nonetheless, OMB
                             permitted use of nearly 54,000 of the positions for which DOD
                             subsequently completed studies, leaving the department approximately
                             14,000 positions to study by the end of fiscal year 2003. DOD recently
                             reported that it has met its 15-percent goal by completing competitions in
                             excess of 71,000 positions between October 1,1999, through June 1, 2003.

                             DOD hopes to reach agreement with OMB to meet its additional
                             158,000-position study requirement through a combination of A-76
                             studies and alternatives to A-76, and change the period of study from
                             fiscal years 2004-08 to fiscal years 2005-09. Regardless, this longer-term
                             goal could be a challenge, requiring completion of a significantly larger
                             number of positions for study than has actually been completed in similar
                             periods in the past. For example, between fiscal years 1997 and 2002,
                             DOD completed competition studies for about 68,000 positions. Under
                             the new goals, DOD would be required to complete studies involving
                             158,000 positions during a 5-year period between fiscal years 2004-08. This
                             is more than double what DOD has been able to complete in the past
                             during a similar time frame.


DOD Faces Other              In addition to size of effort required to meet OMB’s out-year study goals,
Challenges in Meeting A-76   DOD faces a number of challenges in meeting OMB’s A-76 program goals.
Goals                        As we have tracked DOD’s progress in implementing its A-76 program
                             since the mid- to late-1990s, we have identified various challenges and
                             concerns that have surrounded the program.32 We believe those challenges
                             and concerns are still relevant to the department’s current A-76 program.
                             They include (1) the time required to complete the studies, (2) the cost and
                             other resources required to conduct and implement the studies, and
                             (3) the selection and grouping of positions to compete.

                             In addition, as noted earlier, the Army’s core competency review has
                             shown that the designation of “core” does not necessarily mean that
                             in-house employees should perform a function, nor does the designation
                             of “non-core” mean a function should necessarily be considered for
                             alternative sourcing or A-76 competitions. This may cause further


                             32
                               U.S. General Accounting Office, DOD Competitive Sourcing: Some Progress, but
                             Continuing Challenges Remain in Meeting Program Goals, GAO/NSIAD-00-106
                             (Washington, D.C.: Aug. 8, 2000); and DOD Competitive Sourcing: Questions About
                             Goals, Pace, and Risk of Key Reform Initiatives, GAO/NSIAD-99-46 (Washington, D.C.:
                             Feb. 22, 1999).




                             Page 26                                              GAO-03-818 Defense Management
difficulties in selecting and grouping functions for A-76 reviews or other
sourcing alternatives.

OMB’s revised A-76 circular states that standard competitions33 shall not
exceed 12 months from public announcement (start date) to performance
decision (end date). Under certain conditions, a time limit waiver of no
more than 6 months can be granted. The revised circular also states that
agencies shall complete certain preliminary planning—such as scope,
baseline costs, and schedule—before public announcement. Even
so DOD’s studies have historically taken significantly longer than
12-18 months. DOD’s most recent data indicate that the studies take
on average 20 months for single-function studies and 35 months for
multifunction studies. It is not clear how much of this time was needed for
planning that will now be outside the revised circular’s study time frame.

Once DOD components found that the studies were taking longer than
initially projected, they realized that a greater investment of resources
would be needed than originally planned to conduct the studies. We
previously reported that the President’s 2001 budget showed a wide
range of projected study costs, from about $1,300 per position studied
in the Army to about $3,700 in the Navy.34 DOD is now estimating costs
at $3,000 per position for new studies beginning in fiscal year 2004.
However, the much larger number of studies required to be completed in
the out-years to meet OMB’s study goals could require DOD components
to devote much greater total resources to this effort than in the past.

In addition, DOD components, particularly the Air Force, are attempting
to shift military personnel away from commercial type functions to those
more directly related to warfighting. As noted above, because these
functions are not being eliminated, new operations and maintenance
account funds will have to be provided to pay for the additional civilians
or contractors that perform the function(s) currently being performed by
uniformed personnel. As previously mentioned in the report, the Air Force
alone has recently estimated this additional cost to be about $5 billion
over the next 5 years.




33
  Streamlined competitions allow for an abbreviated source selection for 65 or fewer
civilian positions and/or any number of military personnel. Streamlined competitions are
to be completed within 90 days, with a possible extension of no more than 45 days.
34
     GAO/NSIAD-00-106.




Page 27                                                GAO-03-818 Defense Management
This is an issue other services have also encountered in the past and
will in the future as they plan to shift military personnel away from
commercial positions into warfighting positions, either as a result of its
core assessment or as part of its A-76 studies. We have not seen precise,
reliable figures on the extent to which these conversions may occur, and
the extent to which all affected military personnel would be needed in
warfighting positions. In the past we identified instances where service
components were required to absorb these costs without additional
resources. We recommended in our 2000 report that the Secretary of
Defense take steps to ensure that the services increase funding for
operation and maintenance accounts, as necessary, to fund the civilian
and contractor personnel replacing military positions that have been
transferred to meet other needs.35 The department acknowledged that
this practice would require the services to program additional funding for
operation and maintenance accounts, viewing this as a service investment
decision. However, given the increased emphasis the department has
placed on moving the military from commercial functions to warfare,
officials from the Army and the Air Force have expressed concern that
there were not adequate funds to replace the military with civilian or
contractor personnel once their positions have been competed or
transferred. This can have the effect of either limiting the number of
conversions that can be made or requiring Defense components to absorb
the costs within their existing budgets, creating limitations in other
program areas.

As we have previously reported, selecting and grouping functions and
positions to compete can also be difficult. Some functions may be spread
across different geographic locations or may fulfill a roll that blurs the
distinction between “commercial” and “inherently governmental,” thus
preventing the packaging of some commercial positions into suitable
groups for competition. In addition, as previously noted, DOD excluded
certain commercial functions in its FAIR Act inventories from
competition. DOD’s fiscal year 2002 FAIR Act inventory exempted
171,698 positions from competition because of statutory, national security,
or operational concerns. Further, as we have previously reported, most
services have already faced growing difficulties in finding enough study
candidates to meet their A-76 study goals.36 Finally, use of alternatives



35
     GAO/NSIAD-00-106.
36
     GAO/NSIAD-00-106.




Page 28                                       GAO-03-818 Defense Management
                  under the core-competency approach could also limit positions available
                  for A-76 study.

                  Progress varies among DOD components in assessing core competencies
Conclusions       and identifying and pursuing alternative sourcing strategies. Even so, some
                  limitations have been identified which indicate that, contrary to some
                  initial expectations, the determination of whether a function is core by
                  itself will not automatically lead to a sourcing decision because, as the
                  Army has discovered, other factors can also affect sourcing decisions.
                  Clarification of the department’s expectations for sourcing decisions is
                  needed along with additional guidance on other factors that may need to
                  be considered in sourcing decisions. Otherwise, the components may be
                  left with unrealistic expectations on making sourcing decisions or they
                  may make changes in sourcing that later prove to be problematic.

                  Under the core-competency process, the Air Force identified large
                  numbers of military personnel who could be reassigned to meet other
                  military requirements and be replaced by civilian or contractor personnel
                  who may be a more economical alternative. However, to accomplish this
                  reassignment, Air Force officials stated that it would need to find funds
                  for replacement personnel out of operations and maintenance accounts.
                  This is indicative of what other services are likely to face in seeking to
                  accomplish such conversions—the need for additional funding in
                  operations and maintenance accounts to support these conversions.
                  Such conversions may be a more cost-effective alternative than simply
                  increasing military end-strength where shortages exist in military
                  positions. However, decisions to replace military personnel with civilians
                  or contractors without identifying sources for increases in operations and
                  maintenance funds to support those decisions could stress the ability of
                  the operations and maintenance account to meet other pressing needs.


                  We recommend that the Secretary of Defense, through the Senior
Recommendations   Executive Council, clarify its expectations for DOD components in
                  making sourcing decisions based on core competency assessment results
                  and provide additional guidance identifying the range of additional factors
                  to be considered once the determination is made that a function is not
                  considered core.

                  We also recommend that the Secretary of Defense require DOD
                  components to ensure that decisions to convert functions performed
                  by military personnel to performance by civilians or contractors are



                  Page 29                                       GAO-03-818 Defense Management
                     predicated on having clearly identified sources of funding to support
                     those decisions.

                     The Principal Assistant Deputy Under Secretary of Defense (Installations
Agency Comments      and Environment) provided written comments on a draft of this report.
and Our Evaluation   The department generally concurred with our recommendations. With
                     respect to our first recommendation, the department agreed that, in
                     addition to the determination of core competency, there are additional
                     steps necessary to making effective sourcing decisions. However, the
                     response did not indicate what specific guidance, if any, would be
                     provided to clarify and assist the components in making sourcing
                     determinations. Instead, the department suggested that core assessments
                     would be used as input to the Inherently Governmental Commercial
                     Activities Inventory and that the department’s guidance on how to prepare
                     these inventories will be continually refined to help the sourcing decision
                     process. To the extent the department continues to emphasize core
                     competency assessments and alternatives to A-76 competitions in making
                     sourcing decisions, we still believe that additional guidance is needed to
                     assist components on factors other than the designation of core or
                     non-core that need to be considered when making a souring decision.

                     With respect to the second recommendation, the department agreed that
                     the identification of adequate resources is a critical factor in meeting its
                     competitive sourcing goals and, consequently, the response ensures that
                     they will be properly funded. The department also provided a number of
                     technical comments, which we incorporated into the report, where
                     appropriate. The department’s comments are reprinted in their entirety in
                     appendix V.


                     As requested by the Ranking Minority Member of the House Committee on
Scope and            Armed Services, Subcommittee on Readiness, we reviewed DOD’s plans
Methodology          for sourcing non-core functions and the effect this may have on its A-76
                     program. Specifically, the objectives of this report were to assess (1) the
                     department’s progress in assessing its core functions as a basis for
                     sourcing decisions, (2) the plans and progress DOD has made in
                     identifying and implementing alternatives to A-76, and (3) the current
                     status of DOD’s A-76 program.

                     To evaluate the department’s progress in assessing its core functions as
                     a basis for sourcing decisions, we met with responsible officials from the
                     Senior Executive Council, the Business Initiative Council, and the Office
                     of the Secretary of Defense to identify plans and guidance for this


                     Page 30                                        GAO-03-818 Defense Management
initiative. We also met with officials from the Army, the Air Force, the
Navy, the Marine Corps, and the Defense Logistics Agency to identify their
implementation plans, guidance, and analyzed available data to assess
progress being made. Our work was conducted in the Washington, D.C.,
metropolitan area.

To evaluate the plans and progress DOD has made in identifying and
implementing alternatives to A-76, we met with officials in organizations
identified above and obtained and analyzed relevant documentation
pertaining to alternatives identified. Additionally, we spoke with
representatives from the Defense Contract Management Agency and the
Defense Finance and Accounting Service about their Pioneer projects.

Likewise, to assess the status of DOD’s A-76 program, we met with
cognizant officials within DOD and its key components to update
information we had previously obtained in other recent studies in this area
concerning studies planned and completed and we updated information
we had previously obtained regarding challenges associated with this
program. Data on the number of A-76 competitions used in this report
were based on DOD’s Commercial Activities Management Information
System (CAMIS) Web-based system. Because the numbers change daily,
what we reported are the precise figures in the database at the specified
point in time. We have previously identified limitations in accuracy and
completeness of data included in this system, which limit the precision of
information included in the system. Since then, the department has made
changes to improve the accuracy of data in the system, and the database
remains the principal source of aggregate information on studies
underway and completed. However, we did not audit the accuracy of the
numbers in the database. We conducted our review from October 2002 to
May 2003 in accordance with generally accepted government auditing
standards.


We are sending copies of this report to the appropriate congressional
committees; the Secretary of Defense; the Secretaries of the Army,
the Navy, and the Air Force; the Commandant of the Marine Corps; and
the Director, Office of Management and Budget. We will make copies
available to others upon request. In addition, the report will be available at
no charge on the GAO Web site at http://www.gao.gov.




Page 31                                         GAO-03-818 Defense Management
If you or your staff have questions regarding this report, please contact
me on (202) 512-8412 or holmanb@gao.gov. Other contacts and key
contributors to this report are listed in appendix VI.

Sincerely yours,




Barry W. Holman, Director
Defense Capabilities and Management




Page 32                                        GAO-03-818 Defense Management
                         Appendix I: Alternatives to A-76 for Sourcing
Appendix I: Alternatives to A-76 for Sourcing
                         Non-Core Competencies



Non-Core Competencies

                         In its April 2002 memo, the Senior Executive Council noted that “there are
                         a number of imaginative alternatives to DOD ownership of Non-Core
                         competencies.” The memo provided detailed information on six specific
                         alternatives—employee stock ownership plans, transitional benefit
                         corporations, negotiation with private sector, city-base partnership,
                         strategic partnering, and quasi-government corporations. Following is a
                         description of the concept, an example of usage within the government,
                         and recommended Internet sites for each alternative, based on the Senior
                         Executive Council memo.


Employee Stock           Concept: Mechanism used to spin off existing government activities to
Ownership Plans (ESOP)   form an employee-owned company.

                         Description: The ESOP gives federal workers the ability to control
                         their own destiny and obtain a stake in the successful outcome of a
                         new business. ESOP is a contribution benefit plan that buys and holds
                         company stock. Shares in the trust are allocated to individual employee
                         accounts. While many privatizations result in layoffs and disruptions,
                         ESOPs save jobs, retain critical skills, and provide seamless customer
                         service to federal agencies.

                         Where Used Previously: U.S. Investigative Services (1995)

                         Internet Sites: http://www.nceo.org/esops/index.html and
                         http://americancapitalonline.com/datacenter/articleaspArticleID145.html


Transitional Benefit     Concept: Umbrella organization created to facilitate smooth transition of
Corporations (TBC)       government employees.

                         Description: The TBC is designed to transition employees to the private
                         sector while maintaining their federal benefits. Normally, a transition
                         period is established where the government continues to pay for the
                         benefits and then the new private company will eventually pay for those
                         benefits back through the federal government. In addition, the TBC can
                         contract with the private sector and partner with other governmental,
                         private sector, educational or not-for-profit entities. It maintains core
                         capabilities, preserves expertise of key personnel, finds a “soft landing” for
                         underutilized workers, creates business environment for new growth, and
                         provides a new business model for the government.




                         Page 33                                         GAO-03-818 Defense Management
                               Appendix I: Alternatives to A-76 for Sourcing
                               Non-Core Competencies




                               Where Used Previously: Department of Energy

                               Internet Site: http://www.reedsmith.com/db30/cgi-bin/pubs/a76costs.pdf


Negotiation with Private       Concept: Negotiated transfer of government workforce to a private
Sector (i.e., transfer         company.
workforce to the private
                               Description: Negotiate with the private sector in the outsourcing of a
sector as part of a contract   government function to the private sector. However, the government
negotiation)                   negotiates to have the workers who performed the function be hired by
                               the contractor. The goal is to get the employees comparable pay, at the
                               same location (for an agreed upon minimum time period), and a matched
                               retirement plan. It offers stability that a normal A-76 cost comparison
                               study does not provide.

                               Where Used Previously: Army Logistics Data System Modernization with
                               CSC Corporation

                               Internet Sites: http://www.gcn.com/vol20 no6/news/3836-1.html and
                               http://www.csc.com/newsandevents/news/720.shtml


City-Base Partnership          Concept: Transforming a military installation to city-owned property with
                               military, public, non-profit, and commercial tenants occupying and leasing
                               facilities.

                               Description: City Base is transforming a former military installation to
                               city-owned property with military, public, non-profit, and commercial
                               tenants occupying and leasing facilities. The service conveys the
                               installation to the city and then leases back the facilities needed for
                               mission operations. The city may contract with a third party to manage
                               and develop the property.

                               Where Used Previously: Brooks Air Force Base and the City of San
                               Antonio, Texas. The Air Force created the Brooks City-Base Partnership
                               with the city of San Antonio as a means to reduce Air Force base operating
                               and personnel cost and to promote public-public and public-private
                               partnerships. Special authorizing legislation in 1999 and 2000 allowed such
                               partnership in which the Air Force transferred real property to San
                               Antonio in July 2002 in exchange for a leaseback of facilities and for the
                               city to provide municipal services such as fire protection and law



                               Page 34                                         GAO-03-818 Defense Management
                       Appendix I: Alternatives to A-76 for Sourcing
                       Non-Core Competencies




                       enforcement. Also, the Army has implemented a similar type of
                       partnership with the city of Monterey, California.

                       Internet Site: http://www.ci.sat.tx.us/edd/brooks/citybasedef.htm


Strategic Partnering   Concept: Similar to negotiating with the private sector, this establishes a
                       government-industry partnership and leverages the expertise of the
                       commercial marketplace.

                       Description: Strategic partnering moves a function and employees away
                       from the government. The function is not given to a private corporation
                       but is “taken over” by the employees. However, the employees do not form
                       a stand-alone corporation, but instead, a partnership with the private
                       company. It is used when an organization has many of the necessary
                       elements for operating as a private company, but does not have the
                       complete framework necessary to operate as a stand-alone corporation
                       (payroll, benefits programs, taxes, marketing, and business development).
                       A strategic partnership allows the employees to partner with an entity that
                       already has these systems and procedures in place. Such partnering
                       arrangements could be made with a private firm, joint venture, or a
                       non-profit organization.

                       Where Used Previously: National Security Agency (NSA)—CSC-led
                       group with Logicon (Northrup Grumman) and dozens of “Alliance”
                       contractors

                       Internet Site: http://www.reedsmith.com/db30/cgi-bin/pubs/a76costs.pdf


Quasi-Government       Concept: Publicly owned, common stock corporation, chartered by
Corporations           Congress and provided a marketplace niche in which to accomplish some
                       public good. They can be monopolies (e.g., the U.S. Postal Service) or
                       competitors (e.g., Fannie Mae and Freddie Mac).

                       Description: Quasi-government corporations are an alternative similar to
                       the non-profit corporation. The principal difference is that it is established
                       by a government agency in order to serve a governmental purpose, rather
                       than being established by private individual firms. The employees are not
                       federal civil servants and do not participate in the federal retirement or
                       other federal employee benefit systems. The advantages are that they can
                       operate more flexibly than a government agency and they are not required



                       Page 35                                         GAO-03-818 Defense Management
Appendix I: Alternatives to A-76 for Sourcing
Non-Core Competencies




to comply with all of the federal personnel rules and acquisition
regulations.

Where Used Previously: Fannie Mae, Freddie Mac

Internet Sites: http://www.reedsmith.com/db30/cgi-bin/
pubs/a76costs.pdf and http://www.auditor.leg.state.mn.us/fyi19a7.htm




Page 36                                         GAO-03-818 Defense Management
                 Appendix II: Army’s Plans for Transforming
Appendix II: Army’s Plans for Transforming
                 Its In-House Industrial Facilities



Its In-House Industrial Facilities

                 In 2002, the Army’s “Third Wave” initiative received much public attention
                 because of what Army officials have characterized as an unrelated, but
                 parallel effort underway whereby RAND, under contract to the Army,
                 was studying alternatives for rightsizing the Army’s government-owned
                 ammunition manufacturing facilities and two arsenals that manufacture
                 ordnance materiel—facilities that overall had been recognized as having
                 declining workloads, excess capacity, and high operating costs.

                 Although RAND had studied various options, such as privatization
                 and creation of a federal government corporation, the Army decided
                 in March 2003 not to pursue the options outlined in what was then a
                 draft RAND report. Instead, in a March 24, 2003 memorandum to the
                 Commanding General, U.S. Army Materiel Command (AMC), the Secretary
                 of the Army directed the following actions to transform the Army owned
                 portion of its defense industrial base to include ammunition facilities,
                 manufacturing arsenals, and also its maintenance depots:

             •   AMC was directed to develop a written concept for
                 consolidation, divestiture, or leasing, as appropriate, of the
                 government-owned/government-operated and government-
                 owned/contractor-operated ammunition facilities.
             •   AMC was directed to continue to work towards reducing government-
                 owned and operated manufacturing arsenal plant capacity and develop
                 internal efficiency measures for facilities responsible for ground-based
                 systems.
             •   AMC was directed to use existing legal authority to form and maintain
                 partnerships between government-owned and operated maintenance
                 depots and the private sector, and implement initiatives to improve
                 efficiencies, optimize utilization, and upgrade the core capabilities
                 required to meet current and future requirements.




                 Page 37                                       GAO-03-818 Defense Management
                 Appendix III: Senior Executive Council
Appendix III: Senior Executive Council
                 Definitions of Core Competency



Definitions of Core Competency

                 In attempting to define core competency in a defense environment, the
                 Senior Executive Council defined core as “A complex harmonization of
                 individual technologies and ‘production’ (employment, delivery) skills that
                 create unique military capabilities valued by the force employing CINC!”
                 The Council provided the following additional definitions to help in the
                 understanding of core:

             •   Proficiency in the coordination of human activity and employment of
                 technology and technical systems to conduct military operations called
                 for by a CINC.
             •   A complex integration of human knowledge and skills with the
                 technologies of warfare to accomplish a military objective of value to a
                 commander.
             •   It’s what we do better than anyone else to produce specific effects desired
                 by a CINC.
             •   The essence of what we provide in world-class warfighting and related
                 unique capabilities—through a synergistic combination of knowledge,
                 technologies, and people—to produce desired effects for CINCs.
             •   The deep commitment of people, using technologies and delivering
                 capabilities to meet a desired effect in support of national objectives.
             •   A synergistic employment of individual and organizational knowledge,
                 technologies, and capabilities producing world-class services (military
                 operations) to deliver a desired effect to a CINC.




                 Page 38                                       GAO-03-818 Defense Management
                          Appendix IV: Pioneer Projects
Appendix IV: Pioneer Projects


                          In support of the Senior Executive and Business Initiative Councils’
                          direction to identify alternative approaches to A-76 for selected non-core
                          competencies, the services and Defense agencies identified 10 pilot
                          “pioneer” projects. All 10 were approved by the Business Initiative
                          Council and presented to the Office of Management and Budget. Eight
                          of the projects were approved by OMB to be counted toward DOD’s FAIR
                          Act inventory goal. OMB endorsed the pioneer projects whose techniques
                          were waivers to A-76, new requirements, direct service contract, and
                          divestiture, but disapproved the projects that proposed reengineering as
                          their technique. Subsequently, DOD withdrew 2 projects, leaving 6 pilot
                          projects for implementation. A brief description of those projects and their
                          current status is provided below.


Department of the Navy:   Description: Optical fabrication involves eyewear component production
Ophthalmic Services       and assembly and is performed at about 37 locations within and outside of
                          the United States, employing personnel in the Departments of the Navy
                          and Army. The Department of the Navy has the lead responsibility for this
                          pioneer project and is now starting its analysis of this divestiture proposal.
                          It anticipates that the analysis will take approximately 6 to 18 months to
                          complete. A final decision regarding the optical fabrication divestiture will
                          be made after the completion of the analysis.

                          Alternative: Divestiture

                          Positions Affected: Approximately 69 civilians and 300 military

                          Status: Conceptual Stage


Department of the Air     Description: The Brooks City-Base Partnership involves a partnership
Force: Brooks City-Base   between the Air Force and the city of San Antonio for which the Congress
                          passed special authorizing legislation in 1999 and 2000. This divestiture
                          was a way to reduce Air Force base operating and personnel cost and
                          build public-public and public-private partnerships. As part of this effort,
                          the Air Force transferred Brooks Air Force Base’s real property to San
                          Antonio in July 2002 in exchange for a leaseback of facilities and for the
                          city to provide municipal services such as fire protection, law
                          enforcement, custodial and landscaping. Also, as part of this partnering
                          arrangement, the city of San Antonio will provide the Air Force a share of
                          the revenues generated from the contracts and developments resulting
                          from the land and facilities transferred.



                          Page 39                                         GAO-03-818 Defense Management
                            Appendix IV: Pioneer Projects




                            Alternative: Divestiture

                            Positions Affected: Approximately 100 civilian and 40 military

                            Status: Ongoing.


Department of the Army:     Description: According to its current arrangement with the city of
Municipal Services          Monterey, California, the Department of the Army proposed the Municipal
Partnership for Base        Services Partnership for Base Support as its pioneer project. The Army is
                            seeking legislative authority for all components within the department to
Support                     be able to contract directly with local governments for municipal services
                            such as public works and utility.

                            Alternative: Direct Service Contract

                            Positions Affected: Approximately 500 civilian employees (depending
                            upon the number of installations selected for this type of contract).

                            Status: Enabling legislation has been submitted to Congress for
                            consideration as part of the fiscal year 2004 authorization process.

                            The Army is conducting business case analyses for additional installation
                            selection in the event the legislation is approved. However, as of May 2003,
                            this proposal was not included in either the House or Senate approved
                            versions of the bill.


Defense Logistics Agency:   Description: The Defense Logistics Agency (DLA) is proposing that
Metalworking Machinery      the repair and rebuilding of depot-level industrial plant equipment by
Repair/Rebuild Services     in-house personnel at the Defense Supply Center Richmond’s facility in
                            Mechanicsburg, Pennsylvania, be subject to direct conversion through
                            an A-76 waiver in accordance with the Office of Management and
                            Budget Circular A-76’s Revised Supplement Handbook, part I, chapter I,
                            section E.

                            Alternative: Waiver to A-76 Full Cost Comparison Study

                            Positions Affected: Approximately 82 civilians




                            Page 40                                        GAO-03-818 Defense Management
                         Appendix IV: Pioneer Projects




                         Status: DOD assessed the applicability of OMB Circular A-76 to this
                         function and determined that the Mechanicsburg facility is a depot level
                         maintenance and repair operation and is therefore exempt from OMB
                         Circular A-76.


Defense Contract         Description: The Defense Contract Management Agency plans to use a
Management Agency:       streamlined A-76 approach to compete information technology functions
Reengineer Existing      such as desk side support, district offices’ information technology
                         operations, and automated application testing. The streamlined A-76
Information Technology   approach will allow the Defense Contract Management Agency to directly
Structure                compare its costs for these types of functions with those of contractors on
                         the General Services Administration’s schedules. Also, it will shorten the
                         time for completing the A-76 process.

                         Alternative: Streamlined A-76

                         Positions Affected: 450 positions reviewed, approximately 250 positions
                         affected

                         Status: Streamlined A-76 effort is scheduled to start January 2004 with
                         anticipated implementation of the most efficient organization and/or
                         contracts by fiscal year 2005.


Defense Finance and      Description: The Defense Finance and Accounting Service (DFAS) is
Accounting Service:      proposing to acquire computer management services from a commercial
Desktop Management       source. As part of this effort, DFAS plans to use a performance-based
                         service contract to obtain desktop hardware, software, and support
Services                 services.

                         Alternative: New Requirement

                         Positions Affected: Approximately 125 civilians

                         Status: DFAS notified Congress of this proposal and its plans to assess
                         desktop management services. DFAS has completed its desktop
                         management business case assessment and its announcement regarding
                         that decision is imminent.




                         Page 41                                       GAO-03-818 Defense Management
                   Appendix V: Comments from the Department
Appendix V: Comments from the Department
                   of Defense



of Defense




         Page 42                                         GAO-03-818 Defense Management
          Appendix V: Comments from the Department
          of Defense




Page 43                                         GAO-03-818 Defense Management
                  Appendix VI: GAO Contact and Staff
Appendix VI: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Marilyn K. Wasleski (202) 512-8436
GAO Contact
                  In addition to the names above, Debra McKinney, Nancy Lively, R.K. Wild,
Acknowledgments   Daniel Kostecka, and Kenneth Patton also made significant contributions
                  to this report.




                  Page 44                                     GAO-03-818 Defense Management
             Related GAO Products
Related GAO Products


             Sourcing and Acquisition: Challenges Facing the Department of Defense.
             GAO-03-574T. Washington, D.C.: March 19, 2003.

             Proposed Revisions to OMB Circular A-76. GAO-03-391R.
             Washington, D.C.: January 16, 2003.

             Defense Management: New Management Reform Program Still Evolving.
             GAO-03-58. Washington, D.C.: December 12, 2002.

             Commercial Activities Panel: Improving the Sourcing Decisions of the
             Federal Government. GAO-02-847T. Washington, D.C.: September 27, 2002.

             Commercial Activities Panel: Improving the Sourcing Decisions of the
             Federal Government. GAO-02-866T. Washington, D.C.: June 26, 2002.

             Competitive Sourcing: Challenges in Expanding A-76 Governmentwide.
             GAO-02-498T. Washington, D.C.: March 6, 2002.

             DOD Competitive Sourcing: A-76 Program Has Been Augmented
             by Broader Reinvention Options. GAO-01-907T. Washington, D.C.:
             June 28, 2001.

             DOD Competitive Sourcing: Effects of A-76 Studies on Federal
             Employees’ Employment, Pay, and Benefits Vary. GAO-01-388.
             Washington, D.C.: March 16, 2001.

             DOD Competitive Sourcing: Results of A-76 Studies Over the Past
             5 Years. GAO-01-20. Washington, D.C.: December 7, 2000.

             DOD Competitive Sourcing: More Consistency Needed in
             Identifying Commercial Activities. GAO/NSIAD-00-198.
             Washington, D.C.: August 11, 2000.

             DOD Competitive Sourcing: Savings Are Occurring, but Actions Are
             Needed to Improve Accuracy of Savings Estimates. GAO/NSIAD-00-107.
             Washington, D.C.: August 8, 2000.

             DOD Competitive Sourcing: Some Progress, but Continuing
             Challenges Remain in Meeting Program Goals. GAO/NSIAD-00-106.
             Washington, D.C.: August 8, 2000.

             Competitive Contracting: The Understandability of FAIR Act Inventories
             Was Limited. GAO/GGD-00-68. Washington, D.C.: April 14, 2000.


             Page 45                                    GAO-03-818 Defense Management
Related GAO Products




DOD Competitive Sourcing: Potential Impact on Emergency
Response Operations at Chemical Storage Facilities Is Minimal.
GAO/NSIAD-00-88. Washington, D.C.: March 28, 2000.

DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army
Logistics Modernization Program. GAO/NSIAD-00-19. Washington, D.C.:
October 4, 1999.

DOD Competitive Sourcing: Air Force Reserve Command
A-76 Competitions. GAO/NSIAD-99-235R. Washington, D.C.:
September 13, 1999.

DOD Competitive Sourcing: Lessons Learned System Could Enhance
A-76 Study Process. GAO/NSIAD-99-152. Washington, D.C.: July 21, 1999.

Defense Reform Initiative: Organization, Status, and Challenges.
GAO/NSIAD-99-87. Washington, D.C.: April 21, 1999.

Quadrennial Defense Review: Status of Efforts to Implement Personnel
Reductions in the Army Materiel Command. GAO/NSIAD-99-123.
Washington, D.C.: March 31, 1999.

Defense Reform Initiative: Progress, Opportunities, and Challenges.
GAO/T-NSIAD-99-95. Washington, D.C.: March. 2, 1999.

Force Structure: A-76 Not Applicable to Air Force 38th Engineering
Installation Wing Plan. GAO/NSIAD-99-73. Washington, D.C.:
February 26, 1999.

Future Years Defense Program: How Savings From Reform Initiatives
Affect DOD’s 1999-2003 Program. GAO/NSIAD-99-66. Washington, D.C.:
February 25, 1999.

DOD Competitive Sourcing: Results of Recent Competitions.
GAO/NSIAD-99-44. Washington, D.C.: February 23, 1999.

DOD Competitive Sourcing: Questions About Goals, Pace, and Risks
of Key Reform Initiative. GAO/NSIAD-99-46. Washington, D.C.:
February 22, 1999.

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



Page 46                                     GAO-03-818 Defense Management
Related GAO Products




Quadrennial Defense Review: Some Personnel Cuts and Associated
Savings May Not Be Achieved. GAO/NSIAD-98-100. Washington, D.C.:
April 30, 1998.

Competitive Contracting: Information Related to the Redrafts of the
Freedom From Government Competition Act. GAO/GGD/NSIAD-98-167R.
Washington, D.C.: April 27, 1998.

Defense Outsourcing: Impact on Navy Sea-Shore Rotations.
GAO/NSIAD-98-107. Washington, D.C.: April 21, 1998.

Defense Infrastructure: Challenges Facing DOD in Implementing
Defense Reform Initiatives. GAO/T-NSIAD-98-115. Washington, D.C.:
March 18, 1998.

Defense Management: Challenges Facing DOD in Implementing
Defense Reform Initiatives. GAO/T-NSIAD/AIMD-98-122.
Washington, D.C.: March 13, 1998.

Base Operations: DOD’s Use of Single Contracts for Multiple Support
Services. GAO/NSIAD-98-82. Washington, D.C.: February 27, 1998.

Defense Outsourcing: Better Data Needed to Support Overhead Rates for
A-76 Studies. GAO/NSIAD-98-62. Washington, D.C.: February 27, 1998.

Outsourcing DOD Logistics: Savings Achievable But Defense Science
Board’s Projections Are Overstated. GAO/NSIAD-98-48. Washington, D.C.:
December 8, 1997.

Financial Management: Outsourcing of Finance and Accounting
Functions. GAO/AIMD/NSIAD-98-43. Washington, D.C.: October 17, 1997.

Base Operations: Contracting for Firefighters and Security Guards.
GAO/NSIAD-97-200BR. Washington, D.C.: September 12, 1997.

Terms Related to Privatization Activities and Processes.
GAO/GGD-97-121. Washington, D.C.: July 1, 1997.




Page 47                                     GAO-03-818 Defense Management
           Related GAO Products




           Defense Outsourcing: Challenges Facing DOD as It Attempts to Save
           Billions in Infrastructure Costs. GAO/T-NSIAD-97-110. Washington, D.C.:
           March 12, 1997.

           Base Operations: Challenges Confronting DOD as It Renews Emphasis
           on Outsourcing. GAO/NSIAD-97-86. Washington, D.C.: March 11, 1997.




(350292)
           Page 48                                     GAO-03-818 Defense Management
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