Outsourcing and Privatization: Private-Sector Assistance for Federal Agency Studies

Published by the Government Accountability Office on 1999-03-26.

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

      United States

GAO   General Accounting
                    D.C. 20548

          General   Government       Division


      March 26,1999

      The Honorable Ben Nighthorse Campbell
      The Honorable Byron L. Dorgan
      Ranking Minor& Member
      Subcommittee on Treasury, General Government,
         and Civil Service
      Committee on Appropriations
      united states senate

      The Honorable Jim Kolbe
      The Honorable Steny H. Hoyer
      Ranking Minority Member
      Subcommittee on Treasury, Postal Service,
        and General Government
      Committee on Appropriations
      House of Representat&s

      The Honorable Steve Horn
      Subcommittee on Government Management, Information
        and Technology
      Committee on Government Reform
      House of Representatives

      Subject: Outsourcin~ and Privatization: Private-Sector Assistance for Federal AWXY Studies

      -Section 640 of the Treasury, Postal Service, and General Government Appropriations Act of
       1997’authorizes the Of6ce of Management and Budget (OMB) and federal executive branch
       agencies to use private-sector assistance in conducting reviews and analyses2of whether to
       contract out, outsource, or privatize” certain activities under the provisions of the Clinger-

      ’P.L 104-208,Sepknber 30,1996.
      1  .
       pnvate-sectorassktancere~tothepsuiicip&mof             consultants orconsultantknsthatareconixickdfromtheprivate
      sector to perform or as&t in the applicable federal reviews and anaiyws.
          . .      remaining responsible for the affected .setice~. Privatization refers to the transfer of a federal business or
      e              function, including the responsibility for the affected mvices, to the commercial sector.

      Page 1                                                      GAO/GGD-9952E        Private-Sector A&stance       for Federal Stadie~

Cohen Act of 1995 (CCA),’ particularly section 5113 concerning new information systems (L
and infoimation technology (ll”). Section 640 also requires applicable IS/IT studies, 1&.F. 1.,
and analyses carried out under section 5113@)(2)(B) and (C)” of the CCA, hereinafter
referred to as “studies,” that begin on or after September 30,1996, and end before Septembe
1,1999, to (1) Iast no longer than 180 days, unless an extension is approved by the agency
head, and (2) be conducted in a manner that precludes private-sector participants of these
studies from participating in subsequently outsourced work Further, section 640 requires
to review and provide an assessment of its implementation.

To fulfill this requirement, we contacted six executive branch agencies, along with OMB, to
determine what actions they had taken to implement section 640, and particulariy its spec’
emphasis on CCA section 5113 (b)(2)(R) and (C). Additionahy, we obtained information tic
these agencies about private-sector participation on nonXXM%ed             oursourcing and
privatization studies for the same period. These six agencies included the Departments of
Defense (DOD), Energy (DOE), Transportation (DOT), and Health and Human Services
(IIIIS), as well as the National Aeronautics and Space AdminMration (NASA) and the
General Services Administration (GSA). Within DOD, we included the Army, Navy, Air FL
Marine Corps, Defense Logistics Agency @LA), and Defense Finance and Accounting Ser.’
(DFAS). Within DOT, we included the Office of the Secreuuy, FederaI Aviation
      . .
Am             ‘on (FAA), and the Coast Guard. Together, these agencies accounted for $175.
billion, or about 90 percent, of all federal contract dollars reported in the Federal
Procurement Data System Report for fiscal year 1996,the year in which section 640 was
enacted. We obtained readily available documentation to support the information provide6
the agencies we contacted, but did not otherwise independently verify the information.

We conducted our review from October 1998 to March 1999in accordance with generally
accepted government auditing standards. We requested comments on a draft of this letter
from the heads of OMB and the six agencies we reviewed. Their comments are discussed
the end of this letter.

Neither the six agencies we contacted nor OMR had taken action specifically aimed at
implementing section 640. OMR has issued guidance on the implementation of CCA with
respect to new IS/lT investments that addresses contracting out, outsourcing, and
privatization issues6 This guidance, however, did not address section 640 in particular.

’ section 5101 of P.L 104-105,February 10,1995, repealed section 111 of the Federal Property and Amve     !&vices ,.
1949 (popularly referred to as the “Brook Act? and established a new stamry scheme for IT management and acquisition
within the executive branch.
’ Subsection 5113@)(2)(B) provides that OMB direct agencies to determine, before making investment in anew l-T---~--’
system, whether the functions supported by the system should be contracted out, outsourced, or privaUz& Subs&on
5113(b)(2)(C) provides that OMB direct agencies, before making significant investments in miesio~&M    IT, to analyze th
agency’s mission and revise mission-related and adminishative processes as appropb.

’ Examples of such guidance include OMB. memorandum
                                             .       9742 on Funding Info&on         Systems Investments, dated OcL 25:
1996, and the July 1997 Canital mamnune    Gmde, supplement to OMB cinxlar bll.

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                                                                    Private-Sector As&stancefor Federal I

Additionally, officials in the’sk agencies we contacted told us that they were not aware of
section 640 and had not considered it when performing CCA-related studies. However,
according to the officials we interviewed, they did not need section 640 authority to obtain
private-sector assistance for WIT- or non-IS/IT-related outsourcing and privatization studies.

IS/IT Studies Performed Pursuant to CCA
As shown in table 1, of the six agencies we visited in November and December of 1998, DOE,
Air Force, and GSA reported conducting a total of 12 CCA section 5113@)(2)(B) and (C) WIT
studies beginrung after September 30,1995. Also, FAA reported conducting nine studies
pursuant to CCA during &cal years 1996 and 1997 as part of the investment analysis
performed for each of the nine projects. Although, FAA had information on the start and
completion dates of the investment analyses, it was unable to determine whether the
outsourcing portion of the investment analysis study, as defined by section 640, began before,
on, or after September 30,1996. An IMT official from FAA explained that the agency’s IMT
records were not clear as to when each of the studies actually began during fiscal years 1996
and 1997.With the exception of GSA, officials in each of these three agencies also told us that
privatesector assistance was used on each of the studies and that the assktance was
obtained using the agencies’general contracting authority. GSA reported that the decisions
regarding CCA section 5113@)(2)(B) and (C) for each of its six WIT projects beginning after
September 30,1996, were based on studies performed in-house by agency personneL

Specifically, as shown in table 1, DOE reported conducting three studies with private-sector
assistmce after September 30,1996, each of which lasted more than 130 days. According to
an MT official in DOE, DOE did not formally obtain agency head approval for the extended
time on these studies. The Air Force reported three studies that had privatesector a&stance
and began after September 30,1996, and FAA reported nine studies with private-sector
assistmce, but officials in neither agency were able to identify in their records the period of
time for the studies.

Table 1: IS/IT Studies Performed Pursuant to CCA Section 5113(b)(2)(B) & (C) Since Fiscal Year 1999
                              Studies beginning before g/30/96   Studies beginning on or after g/30/96
Federal aqency                Total studies      PSA studies        Total studies        PSA studies
-DOD components’
  Army                                             1                       0                        0                       0
  Air Force                                        9                       9                        3                       3
 &                                                01                       0                         0                      00
DOE                                               2                        2                         3                       3
DOT components
 Offloe of the Secretary                          0                        0                         0                      0
                                                    D                       b                         b                      D
 Coast Guard                                      0                        0                         0                      0
HHS                                               0                        0                         0                      0
GSA                                               0                        0                         6                      0
NASA                                               1                       0                         0                      0
Total                                            14                      11                         12                      6.
Legand: PSA refers to private-sector assistance.
Wavy, which includes the Marine Corps, could not gather the information in time for us to report the number of WIT studii   it
had performed pursuant to CCA, which was enacted in February 1996.

Page8                                                    GAOKGD-99-52R         Phatitor      Assiitame    for Federal Stwlies

‘FM reported that nine studies were conducted with private-sector assistance during fiscal years 1996 and 1997; however,
FAA did not have information on when the studies began.
Source: Agency ofkids.
As explained by DOE, FAA, and Air Force officials, since they were not aware of section 640,
they did not routinely monitor the length of the studies performed or take steps to ensure t”
any studies lasting more than 180 days had specific agency-head approval for the additional
time. DOE officials told us that they believed that the length of the studies generally
depended on the complexity of the MT under consideration rather than on a predetermined
number of days.

In addition, DOE, FM, and Air Force officials said thatthe contractors participating in G&L
studies did not participate in subsequently outsourced work They explained that,
irrespective of section 649, subpart 9.5 of the Federal Acquisition Regulation already require
them to take steps to preclude such organizational conflicts of interest, and they provided -- -
with copies of the exchrsions normally included in the contracts for these types of services.

We discussed the need to inform federal agencies about the effect of section 640 on the
outso-      and priw&ation provisions of CCA with OMB’s staff. They informed us that it e
not OMR’s responsibiliti generally to notify agencies of statutory requirements that have
government-wide impact, and it does not typically do so.

While the other agencies included in our review did not report any studies applicable to the
period set by section 640, table 1 shows that Army, Air Force, DFAS, DOE, and NASA
reported atotal of 14 studiesperformedp ursuant to section 5113@)(2)(R) and (C) that ZL;-
before September 39,1996. According to these agencies’officials, 11 of these studies were
performed with private-sector a&stance obtained through their general contmcting
authority, and 3 studies were performed in-house by agency personnel.

Non-IS/IT Outsourcina and Privatization Studies Performed
For studies other than those.associa ted with CCA-related Is/IT, which are not affected by
section 640, Army, Navy, Air Force, DLA, and DFAS reported, as shown in table 2, that
privat+sector a&stance was used, or was planned, on 2,391 of the 2,939 non-IS/IT-related
putsourcing’ and privatization studies being performed, or planned to be performed, since
fiscal year 1996. These non-HIT-related functions considered for outsourcing included a
wide range of activities, from day care centers on military installations to wholebase suppc
or maintenance operations.

According to DOD officials, private-sector as&stance for competitive sourcing studies is
funded through DOD’s annual appropriations. The non-ISTl’ related functions considered fc

‘~~“decisionsgenerally~governedbyOMBCircularA-76,whichdescribestheprocedures                         (i.e., studies, r&em
and analyses)
     . .       that agencies must perform in order to determine whether a gavemmentoperatedcommercialactivityor
admuustrativefunctionshouldbeoubourcedtotheprivatesecbrorremain             asagovemment4pemtedfunctior~Inessence,~
A-76 process nxpdms the government to kompete” with the private sector to determine which entity is best capable of
performingthe function underconsideration in the most co&-effective manner. To mmgnize this ‘publidprivak competition
espect of the outsourcing process, DOD mfels to the A-76 process as ‘%ompetitive sourcing.”

Page 4                                                   GAO/GGD-99-52B
                                                                     Private-SectorAs&tame for Federal -?

pxivatimtion consisted of the provision of military housing and installation utilities. Private-
sector ass&tame for studies related to providing these two functions are authorized by
specific legislation.

Table 2: Non-MT  Outsourcing and Privatization Studies.Since Fiscal                   Year 1999
                                Outsourcing studies beginning                           Privatization studies beginning
               Grand total     Before g/W99       Onlafter g/30/96                     Before 9kW99       On/after 9/39/99
Federal       Total    PSA     Total      PSA     TOM        PSA                       Total       PSA     Total     PSA
agency      studies studies studies studies studies studies                           studies studies studies’ studiesb
DOD component
  Function’             156         62           0          0       158          62             0           0              0         0
  Housing                43         25           0          0         0           0             0          860            43        25
  Utilities           1,065        617           0          0         0           0          249”                        636       731
  Function’             120         52           1          0       119         52             0            0              0          0
  Housing                16         16           0          0         0          0             0            0             16        1g
  utiliies’             916        916           0          0         0          0            30           30            866      686’
Air Force
  Function’             152          4         52           0       100           4                            0           0         0
  Housing                15         15          0           0         0           0                            0         15        16
  Utilities             463        463          0           0         0           0            0               0        463       4w
 .Function’                  0‘         0        0          0          0          0            0               0           0         0
  Housing                    9          9        0          0          0          0            0               0           9         9

 Function’               4          4            0          0         4          4             0               0           0         0
 Function’               6          6            3         3          5           5            0               0           0         0
 Function’             442          130        65          3        388        127             0               0           0         0
 Housing                 83          65          0         0          0          0             0               0          83        66
 Utilities           2,464        2,196          0         0          0          0           279         116          2,185     2,080
Grand total          2,989        2,391        65          3        385        127           279         116          2,268     2,146
 Legend: PSA refers to privatesectcr assistanca.
‘Includes stud&s fhat were performed, or planned to bs performed, on and after 9/30/96.
Number of housing installations or ufilii systems wifh prfvatizaticn studies.
‘Federally operated commercial or administrative function that is being ccnsidered for outsourcing.
‘Amy officials reported 16 additional utility systems that dii not undergo ths privatization pmcsss because they were always
under private control.
Tofat number of projects to bs considered for privatization and which. according to agency officials, should be performed wfth
private-sector assistance. An Air Force official told us that Air Force pmjacts may or may not be perfonnsd with private-sector
‘Includes utility systems for both Navy and Marines.
 Source: Agency officisls.

Agency Comments
On March 16,1999, NASA’s Audit Liaison, Office of Procurement, told us orally that NASA
concurred with the substance of our report. On March 19,1999, DOT’s Audit Liaison, Office of
the Assistant Secretary for Administration, provided us with FAA’s written technical
comments. We considered and incorporated these comments in our report as appropriate. On
March 22,1999, DOE’s Audit Liaison, Office of the Director, HHS’Audit Liaison, Office of

P8ge 5                                                   GAOBGD-995ZE        Private4ector         A&st.ance       for Federal Studies

Inspector General; DOTS Audit Liaison, Office of the Ass&ant Secretary for Administration;
and GSA’s Audit Liaison, Audit Follow-Up and Evsluation Branch, all told us orally that their
agencies had no comments.           .

On March 23,1999, we also received oral comments from DOD’s Office of the Under
Secretary of Defense for Acquisition and Technology. Although DOD concurred with the
report’s assessment of the implementation of section 640, it suggested that we extract the
non-ISlT related data or further clarify that non-ISTl’ functions are not covered under se&k
640. We clarified the report as suggested by DOD. On March 24,1!I99, an Ass&ant General
Counsel in OMB told us orally that OMB had no comments.

We are sendmg copies of this letter to Senator Fred Thompson, Chairmq and Senator
Joseph I. Lieberman, F&-king Minority Member, Senate Committee on Governmental Afktim,
and to Representative Dan Burton, Chairman and Representative Henry Waxman, Ranking
Minority Member, House Committee on Government Beform. We are also sending copies of
this letter to The Honorable William S. Cohen, Secretary of Defense; l’he Honorable Bill
Richardson, Secretary of En=, The Honorable David J. Bsrram, Administrator, General
Services Administration; The Honorable Donna E. Shah& Secretary of Health and Human
Services; The Honorable Jacob hew, Director, Office of Management and Budget; The
Honorable Rodney E. Slater, Secretary of Transportation; and The Honorable Daniel S.
Goldin, Administrator, National Aeronautics and Space Admh&mtion. We will also make
copies available to others upon request

Major contributors to this letter were Sherrill Johnson, As&tsnt Directoq Michael Rives,
Senior Evaluator, and Bay Occhipinti, Evalwr.      If you or your staff have any questions,
please contact me on (202) 5124337.

Bernard L Ungar        -
Director, Government Business
- operationsIssues

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                                                       Private-Sector   A&stance for Federal Studi
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