oversight

Competitive Sourcing: Implementation Will Be Key to Success of New Circular A-76

Published by the Government Accountability Office on 2003-06-26.

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

                             United States General Accounting Office

GAO                          Testimony
                             Before the Committee on Government
                             Reform, House of Representatives


For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, June 26, 2003      COMPETITIVE SOURCING
                             Implementation Will
                             Be Key to Success of
                             New Circular A-76
                             Statement of David M. Walker
                             Comptroller General of the United States




GAO-03-943T
                                                June 26, 2003


                                                COMPETITIVE SOURCING

                                                Implementation Will Be Key to Success of
Highlights of GAO-03-943T, a testimony          New Circular A-76
before the House Committee on
Government Reform




In May 2003, the Office of                      Overall, the new Circular is generally consistent with the principles and
Management and Budget (OMB)                     recommendations that the Commercial Activities Panel reported in April
issued a new Circular A-76—which                2002, and should provide an improved foundation for competitive sourcing
sets forth the government’s                     decisions in the federal government. In particular, the new Circular permits
competitive sourcing process.                   greater reliance on procedures in the Federal Acquisition Regulation—which
Determining whether to obtain
services in-house or through
                                                should result in a more transparent and consistently applied competitive
commercial contracts is an                      process—as well as source selection decisions based on tradeoffs between
important economic and strategic                technical factors and cost. The new Circular also suggests potential use of
decision for agencies, and the use              alternatives to the competitive sourcing process, such as public-private and
of A-76 is expected to grow                     public-public partnerships and high-performing organizations.
throughout the federal government.

In the past, however, the A-76
process has been difficult to
implement, and the impact on the
morale of the federal workforce
has been profound. Moreover,
there have been concerns in both
the public and private sectors
about the timeliness and fairness of
the process and the extent to which
there is a “level playing field” for
conducting public-private
competitions.

It was against this backdrop that
the Congress enacted legislation                The new Circular should result in increased savings, improved performance,
mandating a study of the                        and greater accountability. However, this initiative is a major change in the
government’s competitive sourcing               way the government operates, and implementing the new Circular A-76 will
process, which was carried out by
                                                likely be challenging for many agencies. A major challenge agencies will face
the Commercial Activities Panel,
which was chaired by the                        will be meeting a 12-month limit for completing the standard competition
Comptroller General of the United               process. This provision aims to respond to complaints about the length of
States.                                         time taken to conduct A-76 cost comparisons. However, GAO studies of
                                                competitive sourcing at the Department of Defense (DOD) have found that
This testimony focuses on how the               competitions can take much longer than 12 months. Other provisions in the
new Circular addresses the Panel’s              new Circular may also prove burdensome in implementation.
recommendations with regard to
providing a better foundation for               Lessons learned by DOD and other agencies as they initiate efforts to
competitive sourcing decisions,                 improve acquisition, human capital, and information technology
and the challenges agencies may                 management could prove invaluable as agencies implement the new A-76
face in implementing the new A-76.
                                                provisions—especially those that demonstrate best competitive sourcing
                                                practices. Successful implementation of the Circular’s provisions will also
                                                likely require additional financial and technical support and incentives.
www.gao.gov/cgi-bin/getrpt?GAO-03-943T.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact William T.
Woods at (202) 512-8214, or
woodsw@gao.gov.
Chairman Davis, Ranking Member Waxman, and Members of the
Committee:

I am pleased to be here today to participate in the Committee’s hearing on
the Office of Management and Budget’s (OMB) revised Circular A-76. The
revisions to the Circular, released May 29, 2003, represent the most
comprehensive set of changes to the rules governing the competitive
sourcing of commercial services in the federal government since the initial
Circular A-76 was issued in 1966.

Today’s hearing occurs at a critical and challenging time for federal
agencies. Agencies are responding to an environment in which new
security threats, demographic changes, rapidly evolving technologies,
increased pressure for demonstrable results, and serious and growing
fiscal imbalances demand that the federal government engage in a
fundamental review, reassessment, and reprioritization of its missions and
operations. Federal agencies are increasingly relying on enhanced
technology and a range of technical and support services to accomplish
their missions. Consequently, it is important for agencies to consider how
best to acquire and deliver such capabilities—including, in some cases,
who the service provider should be.

Determining whether to obtain services in-house, through contracts with
the private sector, or through a combination of the two—in other words,
through insourcing, outsourcing, or, in some cases, co-sourcing—is an
important economic and strategic decision for agency managers. In the
past, however, the government’s competitive sourcing process—set forth
in OMB Circular A-76—has been difficult to implement. The impact of the
A-76 process on the morale of the federal workforce has been profound,
and there have been concerns in both the public and private sectors about
the timeliness and fairness of the process and the extent to which there is
a “level playing field” for conducting public-private competitions. While
Circular A-76 competitions historically have represented only a small
portion of the government’s service contracting dollars, competitive
sourcing is expected to grow throughout the federal government.

It was against this backdrop that the Congress enacted legislation
mandating a study of the government’s competitive sourcing process.1 This



1
 Section 832, Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001,
P.L.106-398 (Oct. 30, 2000).



Page 1                                                GAO-03-943T Competitive Sourcing
                       study was carried out by the Commercial Activities Panel, which I chaired.
                       My comments today will focus on how the new Circular addresses the
                       Panel’s recommendations with regard to providing a better foundation for
                       competitive sourcing decisions and the challenges agencies may face in
                       implementing the new A-76. I will also highlight an important issue
                       involving the protest process under the new Circular.


                       Following a yearlong study, the Commercial Activities Panel in April 2002
New Circular           reported its findings on competitive sourcing in the federal government.
Provides an Improved   The report lays out 10 sourcing principles and several recommendations,
                       which provide a roadmap for improving sourcing decisions across the
Foundation for         federal government. Overall, the new Circular is generally consistent with
Competitive Sourcing   these principles and recommendations.
Decisions              The Commercial Activities Panel held 11 meetings, including three public
                       hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio,
                       Texas. In these hearings, the Panel heard repeatedly about the importance
                       of competition and its central role in fostering economy, efficiency, and
                       continuous performance improvement. Panel members heard first-hand
                       about the current process—primarily the cost comparison process
                       conducted under OMB Circular A-76—as well as alternatives to that
                       process. Panel staff conducted extensive additional research, review, and
                       analysis to supplement and evaluate the public comments. Recognizing
                       that its mission was complex and controversial, the Panel agreed that a
                       supermajority of two-thirds of the Panel members would have to vote for
                       any finding or recommendation in order for it to be adopted. Importantly,
                       the Panel unanimously agreed upon a set of 10 principles it believed
                       should guide all administrative and legislative actions in competitive
                       sourcing. The Panel itself used these principles to assess the government’s
                       existing sourcing system and to develop additional recommendations.




                       Page 2                                       GAO-03-943T Competitive Sourcing
A supermajority of the Panel agreed on a package of additional
recommendations. Chief among these was a recommendation that public-
private competitions be conducted using the framework of the Federal
Acquisition Regulation (FAR). Although a minority of the Panel did not
support the package of additional recommendations, some of these Panel
members indicated that they supported one or more elements of the
package, such as the recommendation to encourage high-performing
organizations (HPO) throughout the government. Importantly, there was a
good faith effort to maximize agreement and minimize differences among
Panel members. In fact, changes were made to the Panel’s report and
recommendations even when it was clear that some Panel members
seeking changes were highly unlikely to vote for the supplemental package
of recommendations. As a result, on the basis of Panel meetings and my
personal discussions with Panel members at the end of our deliberative
process, I believe the major differences among Panel members were few in
number and philosophical in nature. Specifically, disagreement centered
primarily on (1) the recommendation related to the role of cost in the new
FAR-type process, and (2) the number of times the Congress should be
required to act on the new FAR-type process, including whether the
Congress should authorize a pilot program to test that process for a
specific time period.

As I noted previously, the new A-76 Circular is generally consistent with the
Commercial Activities Panel’s sourcing principles and recommendations
and, as such, provides an improved foundation for competitive sourcing


Page 3                                       GAO-03-943T Competitive Sourcing
                       decisions in the federal government. In particular, the new Circular
                       permits:

                       •   greater reliance on procedures contained in the FAR, which should
                           result in a more transparent, simpler, and consistently applied
                           competitive process, and

                       •   source selection decisions based on tradeoffs between technical
                           factors and cost.

                       The new Circular also suggests potential use of alternatives to the
                       competitive sourcing process, such as public-private and public-public
                       partnerships and high-performing organizations. It is not, however,
                       specific as to how and when these alternatives might be used.

                       If effectively implemented, the new Circular should result in increased
                       savings, improved performance, and greater accountability, regardless of
                       the service provider selected. However, this competitive sourcing initiative
                       is a major change in the way government agencies operate, and successful
                       implementation of the Circular’s provisions will require that adequate
                       support be made available to federal agencies and employees, especially if
                       the time frames called for in the new Circular are to be achieved.


                       Implementing the new Circular A-76 will likely be challenging for many
Ultimate Success of    agencies. GAO’s past work on the competitive sourcing program at the
Competitive Sourcing   Department of Defense (DOD)— as well as agencies’ efforts
                       governmentwide to improve acquisition, human capital, and information
Will Depend on How     technology management—has identified practices that have either
It Is Implemented      advanced these efforts or hindered them. The lessons learned from these
                       experiences—especially those that demonstrate best competitive sourcing
                       practices—could prove invaluable to agencies as they implement the
                       provisions in the new Circular.

                       A major challenge agencies will face will be meeting a 12-month limit for
                       completing the standard competition process in the new Circular. This
                       provision is intended to respond to complaints from all sides about the
                       length of time taken to conduct A-76 cost comparisons—complaints that
                       the Panel repeatedly heard in the course of its review. OMB’s new Circular
                       states that standard competitions shall not exceed 12 months from public
                       announcement (start date) to performance decision (end date). Under
                       certain conditions, there may be extensions of no more than 6 months.
                       The new Circular also states that agencies shall complete certain


                       Page 4                                       GAO-03-943T Competitive Sourcing
                           preliminary planning steps before a public announcement. We welcome
                           efforts to reduce the time required to complete these studies. Even so, our
                           studies of DOD competitive sourcing activities have found that
                           competitions can take much longer than the time frames outlined in the
                           new Circular. Specifically, DOD’s most recent data indicate that
                           competitions take on average 25 months. It is not, however, clear how
                           much of this time was needed for any planning that may now be outside
                           the revised Circular’s time frame. In commenting on OMB’s November
                           2002 draft proposal, we recommended that the time frame be extended to
                           perhaps 15 to 18 months overall, and that OMB ensure that agencies
                           provide sufficient resources to comply with A-76. In any case, we believe
                           additional financial and technical support and incentives will be needed
                           for agencies as they attempt to meet these ambitious time frames.

                           Another provision in the new Circular that may affect the timeliness of the
                           process is the “phased evaluation” approach—one of four approaches for
                           making sourcing selections. Under this approach, an agency evaluates
                           technical merit and cost in two separate phases. In the first phase, offerors
                           may propose alternate performance standards. If the agency decides that a
                           proposed alternate standard is desirable, it incorporates the standard into
                           the solicitation. All offerors may then submit revised proposals in
                           response to the new standard. In the second phase, the agency selects the
                           offeror who meets these new standards and offers the lowest cost. While
                           not in conflict with the principles or recommendations of the Commercial
                           Activities Panel, the approach, if used, may prove burdensome in
                           implementation, given the additional step involved in the solicitation.


DOD’s Competitive          DOD has been at the forefront of federal agencies in using the A-76
Sourcing Lessons Provide   process. We have tracked DOD’s progress in implementing its A-76
Insight for Civilian       program since the mid-to-late-1990s and have identified a number of
                           challenges that hold important lessons that civilian agencies should
Agencies                   consider as they implement their own competitive sourcing initiatives.2
                           Notably:

                           •   competitions took longer than initially projected,




                           2
                            U.S. General Accounting Office, Competitive Sourcing: Challenges in Expanding A-76
                           Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 6, 2003).



                           Page 5                                             GAO-03-943T Competitive Sourcing
•   costs and resources required for the competitions were
    underestimated,

•   selecting and grouping functions to compete was problematic, and

•   determining and maintaining reliable estimates of savings was difficult.

DOD’s experience and our work identifying best practices3 suggest that
several key areas will need sustained attention and communication by
senior leadership as agencies plan and implement their competitive
sourcing initiatives.

•   Basing goals and decisions on sound analysis and integrating sourcing
    with other management initiatives. Sourcing goals and targets should
    contribute to mission requirements and improved performance and be
    based on considered research and sound analysis of past activities.
    Agencies should consider how competitive sourcing relates to strategic
    management of human capital, improved financial performance,
    expanded reliance on electronic government, and budget and
    performance integration, consistent with the President’s Management
    Agenda.

•   Capturing and sharing knowledge. The competition process is
    ultimately about promoting innovation and creating more economical,
    efficient, and effective organizations. Capturing and disseminating
    information on lessons learned and providing sufficient guidance on
    how to implement policies will be essential if this is to occur. Without
    effectively sharing lessons learned and sufficient guidance, agencies
    will be challenged to implement certain A-76 requirements. For
    example, calculating savings that accrue from A-76 competitions, as
    required by the new Circular, will be difficult or may be done
    inconsistently across agencies without additional guidance, which will
    contribute to uncertainties over savings.




3
 U.S. General Accounting Office, Best Practices: Taking A Strategic Approach Could
Improve DOD’s Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002);
U.S. General Accounting Office, Information Technology: DOD Needs to Leverage Lessons
Learned from Its Outsourcing Projects, GAO-03-37 (Washington, D.C.: Apr. 25, 2003); U.S.
General Accounting Office, A Model of Strategic Human Capital Management,
GAO-02-373SP (Washington, D.C.: Mar. 15, 2002); U.S. General Accounting Office,
Acquisition Workforce: Status of Agency Efforts to Address Future Needs,
GAO-03-55 (Washington, D.C.: Dec. 18, 2002).



Page 6                                              GAO-03-943T Competitive Sourcing
                             •   Building and maintaining agency capacity. Conducting competitions as
                                 fairly, effectively, and efficiently as possible requires sufficient agency
                                 capacity—that is, a skilled workforce and adequate infrastructure and
                                 funding. Agencies will need to build and maintain capacity to manage
                                 competitions, to prepare the in-house most-effective organization
                                 (MEO), and to oversee the work—regardless of whether the private
                                 sector or the MEO is selected. Building this capacity will likely be a
                                 challenge, particularly for agencies that have not been heavily invested
                                 in competitive sourcing previously. An additional challenge facing
                                 agencies in managing this effort will be doing so while addressing high-
                                 risk areas, such as human capital and contract management. In this
                                 regard, GAO has listed contract management at the National
                                 Aeronautics and Space Administration, the Department of Housing and
                                 Urban Development, and the Department of Energy as an area of high
                                 risk. With a likely increase in the number of public-private
                                 competitions and the requirement to hold accountable whichever
                                 sector wins, agencies will need to ensure that they have an acquisition
                                 workforce sufficient in numbers and abilities to administer and oversee
                                 these arrangements effectively.

                             We recently initiated work to look at how agencies are implementing their
                             competitive sourcing programs. Our prior work on acquisition, human
                             capital, and information technology management—in particular, our work
                             on DOD’s efforts to implement competitive sourcing—provides a strong
                             knowledge base from which to assess agencies’ implementation of this
                             initiative.


Protest Rights of In-house   Finally, an important issue for implementation of the new Circular A-76 is
Competitors                  the right of in-house competitors to appeal sourcing decisions in favor of
                             the private sector. The Panel heard frequent complaints from federal
                             employees and their representatives about the inequality of protest rights.
                             While both the public and the private sectors had the right under the
                             earlier Circular to file appeals to agency appeal boards, only the private
                             sector had the right, if dissatisfied with the ruling of the agency appeal
                             board, to file a bid protest at GAO or in court. Under the previous version
                             of the Circular, both GAO and the Court of Appeals for the Federal Circuit
                             held that federal employees and their unions were not “interested parties”
                             with the standing to challenge the results of A-76 cost comparisons.

                             The Panel recommended that, in the context of improving to the federal
                             government’s process for making sourcing decisions, a way be found to
                             level the playing field by allowing in-house entities to file a protest at GAO,


                             Page 7                                         GAO-03-943T Competitive Sourcing
             as private-sector competitors have been allowed to do. The Panel also
             viewed the protest process as one method of ensuring accountability to
             assure federal workers, the private sector, and the taxpayer that the
             competition process is working properly.

             The new Circular provides a right to “contest” a standard A-76 competition
             decision using procedures contained in the FAR for protests within the
             contracting agencies. The new Circular thus abolishes the A-76 appeal
             board process and instead relies on the FAR-based agency-level protest
             process. An important legal question is whether the shift from the cost
             comparisons under the prior Circular to the FAR-like public-private
             competitions under the new one means that the in-house MEO should be
             eligible to file a bid protest at GAO. If the MEO is allowed to protest, there
             is a second question: Who will speak for the MEO and protest in its name?
             To ensure that our legal analysis of these questions benefits from input
             from everyone with a stake in this important area, GAO posted a notice in
             the Federal Register on June 13, seeking public comment on these and
             several related questions. Responses are due by July 16, and we intend to
             review them carefully before reaching our legal conclusion.


             While the new Circular provides an improved foundation for competitive
Conclusion   sourcing decisions, implementing this initiative will undoubtedly be a
             significant challenge for many federal agencies. The success of the
             competitive sourcing program will ultimately be measured by the results
             achieved in terms of providing value to the taxpayer, not the size of the in-
             house or contractor workforce or the number of positions competed to
             meet arbitrary quotas. Successful implementation will require adequate
             technical and financial resources, as well as sustained commitment by
             senior leadership to establish fact-based goals, make effective decisions,
             achieve continuous improvement based on lessons learned, and provide
             ongoing communication to ensure federal workers know and believe that
             they will be viewed and treated as valuable assets.

                                            -   -   -   -   -

             Mr. Chairman, this concludes my statement. I will be happy to answer any
             questions you or other Members of the Committee may have.




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             Page 8                                         GAO-03-943T Competitive Sourcing
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