oversight

DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army Logistics Modernization Program

Published by the Government Accountability Office on 1999-10-04.

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

                  United States General Accounting Office

GAO               Report to Congressional Committees




October 1999
                  DOD COMPETITIVE
                  SOURCING

                  Plan Needed to
                  Mitigate Risks in Army
                  Logistics
                  Modernization
                  Program




GAO/NSIAD-00-19
Contents



Letter                                                                                 3


Appendixes   Appendix I:   Chronology of the Modernization Initiative                 20
             Appendix II: Comments From the Department of Defense                     21
             Appendix III: GAO Contacts and Staff Acknowledgments                     23


Tables       Table 1: Estimated Cost and Schedule for Wholesale Logistics
               Modernization Alternatives                                             11




             Abbreviations

             AMC       Army Materiel Command
             DOD       Department of Defense
             CECOM     Communications and Electronics Command
             OMB       Office of Management and Budget



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United States General Accounting Office                                                      National Security and
Washington, D.C. 20548                                                                International Affairs Division



                                    B-283303                                                                           Leter




                                    October 4, 1999

                                    The Honorable Floyd D. Spence
                                    Chairman
                                    The Honorable Ike Skelton
                                    Ranking Minority Member
                                    Committee on Armed Services
                                    House of Representatives

                                    The Honorable James M. Inhofe
                                    Chairman, Subcommittee on Readiness
                                     and Management Support
                                    Committee on Armed Services
                                    United States Senate

                                    The Army is seeking to implement a Wholesale Logistics Modernization
                                    Program to reengineer its processes and modernize the aging computer
                                    information systems it uses to manage its inventories of equipment, parts,
                                    and supplies needed to support combat forces. To accomplish this
                                    modernization, the Army plans to contract with the private sector to
                                    reengineer its business processes and develop and operate a new system.
                                    Until the new system is operational, the contractor will operate the existing
                                    computer information system as well. The Army’s goal is to accomplish
                                    these objectives with the same level of resources currently devoted to the
                                    existing system. The contractor selected to perform the work would be
                                    expected to make the capital investment needed to develop the new
                                    system, with the expectation that it would be able to recoup its investment
                                    through future operating efficiencies.

                                    This report responds to the request of the Chairman of the Senate
                                    Subcommittee on Readiness and Management Support, Committee on
                                    Armed Services, that we review the Army’s decision to contract for its
                                    wholesale logistics management information system. It also fulfills a
                                    requirement of the House National Security Committee’s1 report (Report
                                    No. 105-532) on the Strom Thurmond National Defense Authorization Act
                                    for Fiscal Year 1999, which directed us to analyze and determine whether
                                    the information provided by the Army supports this proposed action.

                                    1
                                        Now known as the House Armed Services Committee.




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                   Specifically, this report discusses (1) the Army’s actions to comply with the
                   requirements of 10 U.S.C. 2461, section 8014 of the Department of Defense
                   Appropriations Act for Fiscal Year 1999 (P.L. 105-262), and Office of
                   Management and Budget Circular A-76 and (2) cost uncertainties and other
                   risks that could impact the future success of the modernization program.



Results in Brief   The Army’s plans for implementing its Wholesale Logistics Modernization
                   Program initiative by contracting with the private sector include actions to
                   respond to the congressional notification requirements contained in
                   legislation and the guidance contained in Office of Management and Budget
                   Circular A-76. At the same time, significant uncertainties about the Army’s
                   abilities to execute its modernization program as planned, particularly
                   within preset funding levels, exist. Specifically,

                   • In July 1998, the Army provided advance notification to the Congress,
                     under 10 U.S.C. 2461, concerning its plans to consider contracting for
                     the operation of its existing system and development of a modernized
                     system. It subsequently notified the Congress in April 1999 concerning
                     approval of a waiver of a detailed cost comparison between the public
                     and private sector under Circular A-76. While the Army has not yet
                     provided the Congress with cost information and certifications required
                     under section 2461 and section 8014 of the Department of Defense
                     Appropriations Act for Fiscal Year 1999 (P.L. 105-262), it expects to do so
                     prior to entering into a contract for the modernization effort. To date,
                     the Army has taken actions to comply with legislative and A-76
                     requirements for the plan to contract for the wholesale logistics
                     modernization. However, affected employees have filed four appeals of
                     the A-76 waiver with the Assistant Secretary of the Army for
                     Installations and Environment which are currently pending.
                   • Because it was granted an A-76 waiver, the Army did not conduct a
                     detailed cost comparison, but it did complete a business case analysis to
                     assess prospective costs of various alternatives and as a basis for
                     selecting its planned approach. However, various factors suggest that
                     much uncertainty exists over the Army’s ability to achieve its
                     modernization objectives within preset funding levels and whether a
                     new system would be put in place as quickly as initially anticipated to
                     reduce operating costs. Thus, the Army could be faced with making
                     future tradeoffs between Wholesale Logistics Modernization Program
                     investment costs and its modernization objectives. Additionally, the
                     Army faces uncertainties regarding the number of employees who may
                     be willing to accept employment with the private sector to maintain the



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                         existing system while a new system is being developed. Limited system
                         documentation of the existing system increases the importance of
                         existing employees to continue maintenance of the legacy system while
                         a new system is being developed.

                     This report contains a recommendation to the Secretary of Defense
                     concerning the need to mitigate the risks identified and to closely monitor
                     this program as it progresses.



Background           In August 1997, in response to a tasking from the Army Materiel Command
                     (AMC), the Communications and Electronics Command (CECOM) formed
                     a special project team to gather information and market research to
                     develop alternatives for modernizing its logistics information system
                     processes. The approach the Army ultimately selected was to rely on the
                     private sector to modernize and operate the wholesale2 logistics
                     management information system. This approach affects existing software
                     design, development, and operations involving Army employees and
                     contractors at Army facilities in St. Louis, Missouri, and Chambersburg,
                     Pennsylvania. Under the plan, functions currently performed by
                     government employees would be performed by contractor personnel in the
                     future. Accordingly, the Army must consider legislative provisions and
                     policy guidance that may be applicable.


Overview of the      The Army’s wholesale logistics management information system is
Modernization Plan   currently sustained by the Logistics Systems Support Center in St. Louis,
                     Missouri, and the Industrial Logistics Systems Center in Chambersburg,
                     Pennsylvania. These centers report to the Communications and Electronics
                     Command at Fort Monmouth, New Jersey, a major subordinate command
                     of the Army Materiel Command. The two centers, referred to as Central
                     Design Activities, design, develop, and maintain computer software
                     systems and provide services that manage commodities, such as
                     ammunition, avionics, communications and electronics, tanks, and
                     missiles. The software systems integrate all wholesale logistics functions,


                     2
                       The Army has a two-tiered, wholesale and retail logistics support system. The wholesale
                     system is comprised of the four major commands subordinate to the Army Materiel
                     Command; these subordinate commands procure supplies directly from vendors and hold
                     inventories of stocks to meet the demands of retail customers. Retail customers are
                     field-operating commands, which receive support from the wholesale level.




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including cataloging the inventory of items, processing customer orders,
computing requirements for items and ordering replenishment stocks, and
handling the accounting processes. The budget for the two centers has
been about $40 million annually. The centers support numerous customers
besides AMC, such as the Joint Chiefs of Staff, Defense Logistics Agency,
and the Defense Finance and Accounting Service. In addition to the
$40 million used to sustain the software by the two centers, the Army also
provides funding to have the current software processed by the Defense
Information Systems Agency. This additional funding has been around
$60 million each year.3

The Wholesale Logistics Modernization Program4 is but one portion of a
larger Army strategy for a future logistics system. The larger strategy,
known as Global Combat Support System—Army, is to implement a single
system to provide a seamless, integrated interactive communications and
an automated information system for the Army’s retail and wholesale
logistics support systems, and to support joint and allied operations. The
retail logistics support system is currently undergoing a modernization
effort similar to the wholesale modernization program. The retail
modernization is structured so that federal employees continue to operate
the current system while working with the contractor to develop a new
system, which will be operated and maintained by the contractor.

The software programs associated with the Army’s wholesale logistics
management information system are complex, were initially developed
about 30 years ago, and widely recognized as being in need of
modernization to avoid system failure in the future. To undertake such a
modernization effort, the Army believes its wholesale logistics
modernization program must include business process reengineering. The
goal would be to eliminate non-value added activities and develop
processes that expedite sound decision making. The change would apply
both on the battlefield and at home, and create a system that will be
flexible, adaptable, and responsive to both a peacetime and a wartime
environment. Reduced operating and support costs and the elimination of
data redundancy and inaccuracy are additional anticipated benefits.




3
 This figure includes some costs for data processing that are outside the scope of the
modernization effort.
4
    This program is also referred to as logistics modernization, or LOGMOD.




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                        To accomplish such dramatic change in the wholesale logistics process,
                        while containing costs, the Army decided to leverage industry’s investment
                        in commercial logistics practices. CECOM considered the status quo and
                        three alternatives to accomplish the modernization effort. Specifically, they
                        included:

                        Status Quo: Maintain the current systems, supported by the Central Design
                        Activities as currently staffed, organized, trained, and funded.

                        Alternative I: The Central Design Activities perform legacy sustainment,
                        wholesale logistics modernization, and sustainment of the modernized
                        system.

                        Alternative II: The Central Design Activities perform legacy sustainment;
                        the contractor performs wholesale logistics modernization and
                        sustainment of the modernized system.

                        Alternative III: The contractor performs legacy sustainment, wholesale
                        logistics modernization, and sustainment of the modernized system. In
                        addition, the contractor will employ displaced Central Design Activities
                        workers.

                        The Army selected alternative III, which placed reliance on the private
                        sector to operate the existing legacy system as it undertook the
                        modernization effort and would be expected to operate the modernized
                        system once it was in place. The alternative selected would have the
                        potential to eliminate approximately 478 government civilian employees at
                        the two center locations. AMC wanted to minimize the impact on these
                        employees and help ensure continuity of operation of the legacy system
                        and mission. To accomplish that goal, AMC decided to include as a key
                        requirement in its request for proposals for the private-sector competition
                        that the winning contractor offer displaced employees jobs with
                        comparable pay and benefits, in the employees’ current geographical
                        location, for a minimum of 1 year. A chronology of key decisions associated
                        with the evolution of this program is contained in appendix I.


Policy Guidance and     Office of Management and Budget (OMB) Circular A-76 as well as two
Legislative Reporting   legislative provisions outline important requirements affecting agencies
                        when they consider converting functions from performance by government
Requirements
                        employees to the private sector.




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Since 1955, federal agencies have been encouraged to obtain commercially
available goods and services from the private sector if doing so is
cost-effective. In 1966, OMB issued Circular A-76, which established federal
policy for the government’s performance of commercial activities and set
forth the procedures for studying them for potential contracting. In 1979,
OMB issued a supplemental handbook to the circular that included
cost-comparison procedures for determining whether commercial
activities should be performed in-house, by another federal agency through
an interservice support agreement, or by the private sector. OMB updated
this handbook in 1983 and again in March 1996. 5 The March 1996 Revised
Supplemental Handbook describes a wide range of options government
officials must consider as they contemplate reinventing government
operations. They include “the consolidation, restructuring or reengineering
of activities, privatization options, make or buy decisions” and others. It
also explains that the scope of the handbook is limited to conversion of
recurring commercial activities to or from in-house, contract or
interservice support agreement performances.6

Where A-76 cost-comparison procedures apply, the initial step is to develop
a performance work statement describing what is needed to perform the
activity, which is used as the technical performance section of a solicitation
for private-sector offers. The government also develops a management plan
that describes the most efficient organization for in-house performance of
the activity described in the performance work statement. The cost of
performance by the government in accordance with the most efficient
organization is compared to the cost proposed by the private-sector source
selected pursuant to the solicitation. The activity will be converted to
performance by the private sector if the private sector’s offer represents a
cost differential of at least 10 percent of direct personnel costs or
$10 million over the performance period when compared to the
government’s in-house cost estimate.

The handbook also allows for direct conversions to contractor
performance and cost comparison waivers. In the case of the Department
of Defense (DOD), the authority to issue such a waiver may be delegated to
the cognizant military service Assistant Secretary. A cost-comparison

5
 The Handbook was revised again in June 1999 to issue guidance for implementing the
Federal Activities Inventory Reform Act of 1998 (P.L. 105-270).
6
 While A-76 addresses conversions in both directions, for purposes of this report, we will
focus on conversion from performance by government employees to the private sector.




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waiver must be accompanied by a detailed determination that the
conversion meets at least one of the following requirements:

• the conversion will result in a significant financial or service quality
  improvement and a finding that the conversion will not serve to reduce
  significantly the level or quality of competition in the future award or
  performance of the work or
• the waiver will establish why in-house offers have no reasonable
  expectation of winning a competition conducted under the cost
  comparison procedures.

Cost-comparison waivers are subject to the administrative appeal
procedures contained in the handbook. An appeal must be in writing and
generally submitted within 20 calendar days of documentation being made
publicly available concerning the outcome of the waiver. A final decision
should be made within 30 days of receipt of the appeal.

In addition to Circular A-76, DOD must consider 10 U.S.C. 2461 and section
8014 of the Department of Defense Appropriations Act for Fiscal Year 1999
(P.L. 105-262). Both contain requirements for congressional notifications
concerning the planned performance of functions by the private sector.

Section 2461, as amended by the Strom Thurmond National Defense
Authorization Act for Fiscal Year 1999 (P.L. 105-261), requires that before
any commercial or industrial type function that as of October 1, 1980, has
been 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 analysis. 7 Section
8014 of the 1999 Defense Appropriations Act requires that DOD certify its
in-house estimate to congressional committees before converting any
activity performed by more than 10 DOD civilian employees to contractor
performance. While this provision is applicable to fiscal year 1999 actions
only, we expect that next year’s appropriation act will have this same
provision as it has been included in recent years’ appropriations acts.




7
 The Army notified the Congress prior to the effective date for last year’s amendments. The
prior version of section 2461 contains similar notification, certification, and cost
comparison requirements.




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Army Plans Include      The Army has provided notifications to the Congress under 10 U.S.C. 2461
                        concerning its intent to contract for its modernization effort. The Army
Compliance With         plans to provide the Congress with relevant cost information and
Circular A-76 and       certifications required under section 2461 and the applicable appropriation
                        act provision prior to awarding any contract for the program. Further, the
Legislative Reporting   Army has executed a waiver of the cost comparison provision under the
Requirements            terms of the supplemental handbook.

                        The Army’s notification to the Congress in July 1998 stated that the Army
                        was considering an initiative to rely on private industry to reengineer its
                        wholesale logistics business processes and to provide information
                        management support for these processes. The notification stated that the
                        Army would provide the Congress a summary of its cost comparison and
                        other reports and certifications pursuant to section 2461 prior to entering
                        into a modernization contract.

                        At the time of its initial congressional notification, the Army believed that
                        its planned action was not subject to OMB Circular A-76. Subsequently, the
                        Army changed its view and decided that A-76 did apply. The Army
                        concluded that in-house performance of the reengineering was not feasible
                        or cost-effective, and Army officials decided to seek a waiver to A-76
                        cost-comparison requirements from the Assistant Secretary.

                        On April 27, 1999, the Army submitted a notification to the Congress that a
                        waiver of the A-76 cost comparison process had been approved. The waiver
                        was approved by the Assistant Secretary of the Army (Installations and
                        Environment) pursuant to section E of chapter 1 of the supplemental
                        handbook. Specifically, the waiver stated that the modernization initiative
                        will result in significant service quality improvement beyond that which
                        could be reasonably expected from a reorganization of the current
                        approach, that the modernization effort will not serve to reduce
                        significantly the level or quality of competition in the future award of work,
                        and that the functions involved are not inherently governmental. However,
                        pursuant to the waiver appeal process provided for in A-76, four appeals
                        have been filed by affected employees with the Assistant Secretary of the
                        Army for Installations and Environment and are currently pending. This
                        latest congressional notification reiterated that section 2461 cost
                        information would be provided prior to entering into a contract for the
                        performance of the modernization effort. DOD likewise is expected to
                        provide the 1999 Defense Appropriations Act certification prior to entering
                        into a contract for the modernization project.




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Cost and Personnel      Because it was granted an A-76 waiver, the Army did not conduct a detailed
                        cost comparison between the public and private sectors for its wholesale
Uncertainties Could     logistics modernization program. Nevertheless, it did complete a business
Adversely Impact        case analysis in formulating its logistics modernization strategy. The Army’s
                        business case analysis outlined the modernization program alternatives
Modernization Efforts   being considered and analyzed each alternative’s estimated costs, benefits,
                        and risks. While numerous criteria were considered in developing
                        alternative strategies, emphasis was placed on cost containment and a
                        transition approach for affected government employees in selecting the
                        preferred alternative. Table 1 summarizes the estimated cost and schedule
                        for the three alternatives. (The Army determined that the status quo was
                        not a viable option because it could not meet the design, implementation,
                        and timeliness of future requirements. The Army concluded that the risk of
                        doing nothing was unacceptable.)



                        Table 1: Estimated Cost and Schedule for Wholesale Logistics Modernization
                        Alternatives

                        Current dollars in millions
                                                          Estimated cost to government
                                                      Program cost over                 New system        Time to deploy
                        Alternative                   the 10-year perioda         development costb          new system
                        I
                        (All work done
                        in-house)                                    $581.7                  $562.5                8 years
                        II
                        (In-house/contractor
                        mix of work)                                   425.2                  329.8                6 years
                        III
                        (All work done by
                        contractor)                                    420.9                  253.5                5 years


                        Note: We did not attempt to validate the figures in the table.
                        a
                         Cost of performing the legacy sustainment and modernization to a common end-state over a 10-year
                        period.
                        b
                         This cost is included in the 10-year program cost. The cost of new system development includes
                        sustaining the legacy system until the new system is deployed.
                        Source: The Business Case, Wholesale Logistics Modernization Program, February 12, 1999.




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                     According to the Army, its analysis showed that alternative III, which called
                     for contractor operation of the legacy system while developing the
                     modernized system, was the alternative expected to require the least time
                     to develop a new system, the smallest estimated investment costs, and the
                     lowest estimated operational costs over a 10-year period. It was also
                     considered the option most likely to be able to meet the Army’s goal of a
                     solution that was executable within the program’s existing operating
                     budget.8 However, available Army data show a range of uncertainty about
                     the cost estimates that could make it difficult to achieve this objective.
                     Also, uncertainties associated with the transfer of the work to the private
                     sector could affect program stability during the transition period.


Cost Uncertainties   The Army’s request for proposals provides for an expenditure limit on the
                     planned contract, with certain exceptions, 9 of under $40 million a year, the
                     approximate current funding level of the two centers. The request for
                     proposals further provides that up to an additional $30.5 million per
                     contract year would be available for the data processing of the modernized
                     services. The amount allowed for processing is to be based directly on the
                     percentage of data processing performed by the contractor, with the
                     Defense Information Systems Agency performing the residual processing.
                     However, various factors suggest much uncertainty as to whether the
                     modernized system may be achievable within the projected funding level.

                     First, as part of its economic analysis, AMC performed a limited sensitivity
                     analysis on alternative III10 by assessing how underlying assumptions could
                     affect cost estimates. The analysis showed that for this alternative,
                     developmental costs, an element of investment cost, ranged from a low of
                     $107.3 million to a high of $232.7 million. For purposes of its comparison of
                     alternatives, the Army adopted an estimate at the mid-point of this range;
                     nevertheless, the analysis underscored the uncertainty associated with
                     development cost estimates. Further, concerning the issue of additional

                     8
                      The Army’s approach is predicated on the assumption that a contractor will be willing to
                     provide a sizable investment in the first few years with the anticipation that those costs, and
                     a profit, will be forthcoming in the later years of the contract.
                     9
                       Exceptions include additional functionality and in-processing changes, data processing for
                     transferred systems, data processing for modernized services, related logistics services, and
                     expanded services.
                     10
                       Documentation of the Army’s economic analysis states that a sensitivity analysis was
                     conducted only for alternative III because it was the most favorable option.




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requirements in the future, the economic analysis states that “the cost of
system growth, adding new functions during the ten year contract, has not
been addressed by the estimate and could be a significant area of cost
considering the number of related logistic process improvement plans.”
Underestimating the effects of changing requirements can significantly
affect software development schedule and costs. History shows that the
average project experiences about a 25-percent increase in requirements
over its lifetime. Such a change can produce at least a 25-percent addition
to the software schedule and increase cost. Also, projects that skimp on
initial system development activities, such as requirement definition, must
have the same work performed later at anywhere from 10 to 100 times the
cost of doing it properly in the first place.

Second, cost uncertainties also exist because of the uncertain nature of the
requirements. The request for proposals11 provides for a contract that
contains a requirements portion and indefinite delivery portion. The work
is to be performed pursuant to task orders issued on both a firm fixed price
and time and materials basis. The cost of the work is not known in advance
for any of the task orders. The cost estimates of those task orders to be
issued on a time and materials basis are particularly uncertain, even though
the hourly rates would be fixed in the contract, because the number of
labor hours and the cost of materials are not.

A third risk area that could affect costs relates to the Army’s tentative plans
for developing and implementing a modernized information system under
an incremental approach. Under the incremental approach, changes
affecting the legacy system would be made on a graduated basis. This
would allow a gradual transition from the legacy system to the modernized
system, requiring less sustainment of the legacy system as the functions are
transferred from the old to the new systems. Should this prove feasible, the
government would likely begin to realize the benefits of a modernized
system sooner, and the contractor might be able to achieve operating
efficiencies much sooner—and realize additional revenues by assuming
responsibilities for processing the new software code as it comes online.
Until that occurs, the processing of the existing software will continue to
be performed by the Defense Information Systems Agency. However, an
Office of Secretary of Defense official providing oversight for the
modernization effort has expressed concern that a modular, incremental


11
  The Army issued its request for proposals on April 29, 1999; contractor proposals were
submitted June 28, 1999.




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approach of transferring functions from the legacy system to a new,
modernized system will not work. He indicated that since the new system
is expected to be predicated upon reengineered processes, and new
software code tied to the new processes, this would likely preclude a
one-for-one modular replacement between old and new systems. An Army
official responsible for oversight of information systems issues agreed that
such an incremental approach is likely not to be feasible.

Fourth, known problems with DOD data—particularly “cost” data—
undermine confidence in the reliability of the cost estimates. DOD has
acknowledged fundamental problems with its ability to accumulate reliable
cost information. Continuing problems in this area were confirmed by our
most recent audit of the federal government’s 1998 consolidated financial
statements.12 For example, we reported that DOD is unable to provide data
on the costs associated with functions to be considered for A-76
outsourcing competitions. Our audit also revealed a material deficiency in
DOD’s ability to report budget information. Given the severity of these
deficiencies, the estimated cost of the modernization effort must be
considered uncertain.

Each of the above factors has the potential to affect the timing and costs
associated with developing and implementing the Army’s modernized
wholesale logistics information management system. This could put the
Army in the difficult position of having to revisit issues of cost, timing, or
making tradeoffs in terms of modernization objectives. Close program
monitoring against specific program objectives and milestones will be
important to ensuring the program meets the requirements of relevant
legislation and policy guidance, including the Clinger-Cohen Act of 1996,
which requires federal agencies to have processes and information to help
ensure that technology projects (1) are implemented at acceptable costs,
within reasonable and expected time frames and (2) contribute to tangible,
observable improvements in mission performance. Such monitoring or
tracking of progress should be facilitated by the use of a performance plan
establishing specific goals and indicators to measure performance as
provided for in the Government Performance and Results Act of 1993.
Without performance measures, managers often have great difficulty
getting results from information systems because they cannot define their
needs precisely.


12
  Financial Audit: 1998 Financial Report of the United States Government
(GAO/AIMD-99-130, Mar. 31, 1999.)




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Uncertainty Over            As the Army contemplates relying upon a contractor to operate the legacy
Employees’ Receptivity to   system while developing a modernized system, uncertainties exist
                            regarding the extent to which government employees will be willing to
“Soft-Landing” Package      accept the “soft-landing” approach of employment with the winning
                            contractor. Given the limited amount of documentation on the legacy
                            system, the continued support of the existing workforce could be
                            important to continuing maintenance of the system during the transition
                            period. While experience in other DOD cases suggests that significant
                            numbers of government employees in other circumstances have accepted
                            similar employment opportunities with the private sector, the large number
                            of center employees nearing retirement eligibility under the Civil Service
                            Retirement System could limit the number of acceptances depending on
                            the availability of opportunities for other government positions.

                            An important feature of the Army’s approach to the modernization program
                            is a so-called soft landing for displaced government employees,13 ensuring
                            them of employment with the winning contractor. The Army believes such
                            an approach also has important benefits to both the government and the
                            contractor since these employees may be essential to maintaining the
                            Army’s existing legacy system as a modernized system is being developed.
                            The current system, as it has evolved over time, consists of over 560
                            program applications, 3,000 major subordinate command bridging
                            programs, 260 databases, and over 20 million lines of computer software
                            code. Available information suggests that the institutional knowledge of
                            the current employees may be essential to maintaining the system given
                            extensive system modifications that have been made over the years, but
                            with limited documentation. Based on analyses of the Central Design
                            Activities completed in 1994 and 1997, employing criteria developed by the
                            Software Engineering Institute, both centers ranked very low in written
                            technical documentation needed to replicate operation and maintenance of
                            their systems.14 This means that much of the institutional knowledge


                            13
                              Specifically, the “soft landing” requires the contractor to offer displaced employees jobs
                            with comparable pay and benefits, in the employees’ current geographical location, for a
                            minimum of 1 year. Displaced employees are those who are on the Central Design Activities’
                            rolls on the date immediately preceding the transfer and who are involuntarily separated
                            from federal service as a result of the contracting action.
                            14
                              The Industrial Logistics Systems Center was determined to be level 2 by the Software
                            Production Consortium in October 1997 and the Logistics System Support Center was
                            ranked as level 1 by itself and the Software Engineering Institute in 1994. The scale goes
                            from 1 to 5, with 1 being the lowest ranking.




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concerning the existing system resides with the individual employees who
have been responsible for maintaining and modifying the system over time.

The Army currently plans for the wholesale logistics modernization
program contractor to assume operation and maintenance of the existing
legacy system about 90 days after contract award. The contractor is
expected to maintain and operate the legacy system, in full or in part, until
the modernized system becomes fully operational in an estimated 5 years.
Whether a contractor can sustain a system as complex as the Army’s
without adequate documentation and staff experienced with that system
remains uncertain. In its business case analysis, the Army acknowledged
the potential for “interruption of wholesale logistics services to the war
fighter due to the transfer of expertise, workload, software, and
documentation of its legacy system to the contractor.” The mitigation
proposed by the Army, however, does not fully address the risk. The Army’s
mitigation strategy was that “the government would retain control of the
wholesale logistics processing at the Defense Information Systems Agency
Megacenters.” However, the risk is in the contractor’s ability to sustain the
legacy software, not process it.

While the Army’s request for proposals requires that displaced government
employees be given positions with the winning contractor for a period of at
least 1 year, the number of employees who would be willing to accept such
positions, if offered, is unknown. About 85 percent of the current center
employees are participants in the government’s Civil Service Retirement
System, and 83 percent will be eligible for either regular or early retirement
within 5 years15—reportedly making them reluctant to leave Federal
service before becoming eligible for retirement.

The number of persons willing to accept the soft-landing package could be
significantly affected by the availability of other federal opportunities for
employment. During on-site interviews, staff indicated to us that they
would prefer to continue working for the federal government rather than
join the contractor. A 1997 study sponsored by the Office of the Secretary
of Defense and conducted in RAND’s National Defense Research Institute,
Outsourcing of DOD Commercial Activities: Impacts on Civil Service

15
  Regular voluntary retirement occurs when an employee wants to retire and meets the full
age and service eligibility requirements. Early voluntary retirement occurs when an
employee meets lesser age and/or service requirements than for regular voluntary
retirement. Authority to grant early voluntary retirement must be approved by the Office of
Personnel Management.




Page 16                                      GAO/NSIAD-00-19 DOD Competitive Sourcing
                 B-283303




                 Employees, addresses this issue. The report states, “Civil service workers
                 are averse to leaving civil service and accepting employment with
                 private-sector contractors. Reasons cited are nonportability of some
                 federal retirement benefits, better civil service wages and benefits, and
                 better job security.”

                 Officials from CECOM’s personnel office told us that the current employees
                 expressed an overwhelming preference to remain in government service.
                 CECOM does not plan to conduct a formal survey to determine the number
                 of staff by functionality that would actually go to work for the winning
                 contractor, since many staff do not make decisions until the action is
                 imminent.

                 At the same time, we found that some employees are already beginning to
                 seek other federal employment and that existing shortages of information
                 technology personnel within the government could provide other options
                 for the affected employees. As of May 31, 1999, the CECOM personnel
                 office told us its estimate of displaced employees who would be required to
                 be offered jobs by the contractor has been reduced from 350 to 335.
                 However, it believes the number may be further reduced since there
                 already has been more attrition than expected because of uncertainty
                 about the program’s future. An official in the Office of Secretary of Defense
                 has expressed concern that continuing program uncertainties could
                 endanger the capability of the Army to maintain its existing wholesale
                 logistics functionality.



Conclusions      To date, the Army has taken actions to comply with legislative and A-76
                 requirements for the plan to contract for the wholesale logistics
                 modernization. While we agree that there is a need to modernize and
                 improve operating efficiencies, we believe the modernization initiative has
                 significant uncertainties and risks. We expect some of these uncertainties
                 will be addressed during the contract negotiation process. Even then, the
                 uncertainties over cost and implementation schedule for the modernized
                 system are likely to remain for some time. Also, performance measures
                 have not been established for measuring whether the modernization
                 program is achieving observed results.



Recommendation   We recommend that the Secretary of Defense require the Secretary of the
                 Army to develop a transition plan based on an assessment of the



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                      B-283303




                      quantitative and qualitative risks associated with this project and what
                      actions are planned to mitigate those risks. We also recommend that the
                      Secretary of Defense require the Secretary of the Army provide for
                      sufficient oversight with quantifiable performance measures to track the
                      success of the modernization program.



Agency Comments and   The Deputy Under Secretary of Defense (Logistics) provided written
                      comments on a draft of this report. The Department of Defense concurred
Our Evaluation        with the report’s recommendations to develop a strategy to ensure actions
                      are in place to mitigate the risks associated with the Wholesale Logistics
                      Modernization Program. It indicated the Army will develop a transition
                      plan that will be put in place before contract award. The department also
                      stated that the Army plans to negotiate performance metrics as part of the
                      contract award. We are encouraged that DOD is starting to address the
                      risks and uncertainties that have been identified for this major
                      modernization effort. However, as we previously noted, we expect that the
                      uncertainties over cost and implementation schedule for the modernized
                      system will continue for some time and, as indicated in our
                      recommendation, will require high level oversight to track the success of
                      the modernization program.

                      DOD also provided technical comments, which have been incorporated as
                      appropriate. The department’s written comments on a draft of this report
                      are included in appendix II.



Scope and             To determine if the Army’s actions complied with the requirements of
                      applicable legislation and policy guidance, we reviewed Circular A-76 and
Methodology           relevant legislation; the Army’s programming and implementation plans;
                      and the A-76 waiver package, including the business case and economic
                      analysis, although we did not establish the reliability of the data. We
                      interviewed senior officials at the Logistics Systems Support Center, St.
                      Louis, Missouri; the Industrial Logistics Systems Center, Chambersburg,
                      Pennsylvania; CECOM, Fort Monmouth, New Jersey; and AMC, the Army’s
                      Office of General Counsel, and the Office of Management and Budget,
                      Washington, D.C. We met and talked with many of the employees of both
                      Central Design Activities in St. Louis and Chambersburg. We also made use
                      of our prior work regarding A-76 issues.




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B-283303




To assess the risks associated with this proposal, we reviewed the A-76
waiver package, which included the business case, economic analysis, and
risk analysis of proposed alternatives, although we did not independently
verify the data. We also reviewed the request for proposals and the
solicitation package. We interviewed officials at the Office of the Assistant
Secretary of Defense, Command, Control, Communications, and
Intelligence and the Army Office of the Director of Information Systems for
Command, Control, Communication, and Computers charged with
monitoring the program and officials at AMC, CECOM, the Central Design
Activities, and the Defense Information Systems Agency. We also made use
of our prior work in the outsourcing area.

We conducted our review from May 1998 through August 1999 in
accordance with generally accepted government auditing standards.


We are providing copies of this report to the Honorable Charles S. Robb,
Ranking Minority Member of the Subcommittee on Readiness and
Management Support, Senate Armed Services Committee; the Honorable
Ted Stevens, Chairman of the Senate Committee on Appropriations; the
Honorable Robert C. Byrd, Ranking Minority Member of the Senate
Committee on Appropriations; the Honorable C.W. Bill Young, Chairman of
the House Committee on Appropriations; the Honorable David R. Obey,
Ranking Minority Member of the House Committee on Appropriations; the
Honorable James M. Talent, House Armed Services Committee; the
Honorable William S. Cohen, Secretary of Defense; the Honorable Louis
Caldera, Secretary of the Army; and the Honorable Jacob J. Lew, Director
of OMB. We will make copies available to others upon request.

If you have any questions regarding this report, please contact me on
(202) 512-8412. Other GAO contacts and other key contributors to this
assignment are listed in appendix III.




David R. Warren, Director
Defense Management Issue




Page 19                               GAO/NSIAD-00-19 DOD Competitive Sourcing
Appendix I

Chronology of the Modernization Initiative                                                                                                  Appendx
                                                                                                                                                  Ii




August 1997        In response to tasking from the Army Materiel Command (AMC), the Communications and Electronics Command
                   formed a Special Project Team to gather information and market research to develop alternatives for modernizing
                   its logistics processes.
October 1997       Contractors were invited to present their approach to performing the function.
February 1998      AMC approved the team’s approach, which proposed to contract for development and sustainment of the wholesale
                   logistics system, provide a “soft landing” for affected government employees, and provide for contractor operation of
                   legacy systems until total implementation of a modernized system could be completed.
April 28, 1998     Concerned that the proposed approach would place “national security at risk” by contracting for “mission essential
                   support to the warfighter,” the Chairman of the Military Readiness Subcommittee, House Committee on National
                   Security, requested that the Office of the Assistant Secretary of the Army (Manpower and Reserve Affairs) and the
                   Army Audit Agency answer specific questions about the proposed action. The Army considered its planned action
                   was not subject to A-76 requirements.
July 15, 1998      Pursuant to 10 U.S.C. 2461, the Army notified the Congress of its intent to rely on private industry to modernize its
                   information management system for wholesale logistics. The notification stated the Army would provide the
                   Congress a summary of its cost comparison and other reports and certification required under 2461 prior to
                   contract award.
August 17, 1998    The Army Audit Agency published its report.
October 22, 1998   Because the Army changed its view and decided that A-76 should apply, the Commander of AMC sent an A-76
                   waiver package to the Assistant Secretary of the Army for Installations, Logistics and Environment, a recommending
                   that a cost-comparison waiver be granted. AMC recommended an alternative that would transfer responsibility of
                   software support services to a private contractor, reengineer the business processes and recommend changes,
                   and replace the legacy system with commercial software applications.
March 3, 1999      The original waiver package was revised, based on input from cognizant Army organizations, and resubmitted to
                   the Assistant Secretary. This package included a revised business case analysis, an economic analysis, an
                   acquisition strategy, a logistics integration agency study, background research of industry’s achievements in supply
                   chain management, and a risk analysis of proposed alternatives. A draft request for proposals was also sent
                   forward.

                   The memorandum supporting the waiver request emphasized the need to modernize the Army’s logistics support
                   system and proposed to leverage industry’s investments and technology in the logistics field. The basis for the
                   waiver request was threefold: (1) the conversion would result in significant service quality improvement, (2) the
                   conversion would not serve to reduce significantly the level or quality of competition in the future award or
                   performance of work, and (3) the functions to be converted are not inherently governmental.
April 20, 1999     The Assistant Secretary approved the A-76 waiver request—the first A-76 waiver approved by the Army.
April 27, 1999     The Army informed the Congress that it had approved a waiver of the cost comparison requirements of A-76. The
                   notice also reconfirmed the Army’s intent to provide a detailed summary of its cost comparison and other reports
                   and certifications pursuant to section 2461 prior to entering into any contract for wholesale logistics modernization.
April 29, 1999     Employees and union are officially notified.
                   Final request for proposals is issued.
May 13-28, 1999    A total of four appeals are filed with the Assistant Secretary of the Army for Installations and Environment by both
                   the Industrial Logistics Systems Center and the Logistics System Support Center and are currently pending. The
                   appeals are from individuals, a group of individuals, and the Local 1763 union, representing employees at the St.
                   Louis Central Design Activity.
June 17, 1999      Appellants are notified that the Secretary of the Army will resolve the appeals after he has received a
                   recommendation from an independent panel of senior civilian officials after July 30, 1999.
                                            a
                                                Now known as the Assistant Secretary of the Army (Installations and Environment).




                                            Page 20                                             GAO/NSIAD-00-19 DOD Competitive Sourcing
Appendix II

Comments From the Department of Defense                           Appendx
                                                                        Ii




              Page 21      GAO/NSIAD-00-19 DOD Competitive Sourcing
Appendix II
Comments From the Department of Defense




Page 22                                   GAO/NSIAD-00-19 DOD Competitive Sourcing
Appendix III

GAO Contacts and Staff Acknowledgments                                                           AppendxIi




GAO Contacts           Barry Holman, (202) 512-5581
                       Marilyn Wasleski, (202) 512-8436



Acknowledgments        In addition to those named above, John Brosnan, Stephanie May,
                       J. T. “Mickey” McDermott, Debra McKinney, and Bonita Page made key
                       contributions to this report.




(709391)       Leter   Page 23                            GAO/NSIAD-00-19 DOD Competitive Sourcing
Appendix III
GAO Contacts and Staff Acknowledgments




Page 24                                  GAO/NSIAD-00-19 DOD Competitive Sourcing
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Contents




Table 1: Estimated Cost and Schedule for Wholesale Logistics
  Modernization Alternatives                                          11




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