oversight

Quadrennial Defense Review: Status of Efforts to Implement Personnel Reductions in the Army Materiel Command

Published by the Government Accountability Office on 1999-03-31.

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

                   United States General Accounting Office

GAO                Report to Congressional Committees




March 1999
                   QUADRENNIAL
                   DEFENSE REVIEW
                   Status of Efforts to
                   Implement Personnel
                   Reductions in the Army
                   Materiel Command




GAO/NSIAD-99-123
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-281817

                   March 31, 1999

                   Congressional Committees

                   In May 1997, the Secretary of Defense issued the Report of the
                   Quadrennial Defense Review (QDR), which directed the Army to reduce
                   personnel to help free up funds to be used to modernize the force. The
                   Army expected that the Army Materiel Command (AMC) could significantly
                   reduce the number of its civilian personnel by increasing reliance on the
                   private sector. Congress has been concerned about the extent of
                   reductions in AMC over the years. Accordingly, the Strom Thurmond
                   National Defense Authorization Act for Fiscal Year 1999 required us to
                   review the personnel reductions in AMC that were directed as a result of
                   the QDR. Specifically, this report addresses (1) AMC’s plans and time frame
                   for achieving the reductions, (2) the projected cost savings from such
                   reductions, and (3) the cited impacts the reductions will have on workload
                   and readiness.


                   The Army Materiel Command has identified various initiatives to eliminate
Results in Brief   8,530 civilian positions by fiscal year 2004 as called for in the Quadrennial
                   Defense Review. The majority of the reductions are now based on planned
                   organizational changes, operating efficiencies, and anticipated future
                   workload decreases, with lesser emphasis on competitive sourcing studies
                   than originally anticipated by the defense review. About 20 percent of the
                   reductions are expected to occur over the next 2 years, and actions are
                   underway to achieve the majority of these reductions. Most, or about
                   80 percent, of the reductions are expected to occur in fiscal years 2001
                   through 2004. However, plans for some of these reductions are still being
                   finalized and uncertainties exist about some of these plans.

                   The Army estimated that the personnel reductions in the Command would
                   result in $1.4 billion in cumulative savings from fiscal year 1999 through
                   2004 and $589 million in annual recurring savings thereafter. Our analysis
                   indicates that estimated savings will be less than anticipated both in the
                   short and long term. The Army did not account for all of the investment
                   costs that would be required to achieve the savings. For example, the
                   Tank-automotive and Armament Command estimated that about
                   $35 million in investment costs were not included in the Army’s analysis of
                   projected savings. Also, the Army did not estimate all the personnel
                   separation costs likely to be associated with implementing the reductions.
                   Additionally, about $21 million in savings estimated for fiscal year 2000




                   Page 1                              GAO/NSIAD-99-123 Quadrennial Defense Review
             B-281817




             could be delayed because competitive sourcing studies are taking longer
             to complete and implement than planned. Furthermore, the savings are
             overstated by an estimated $52 million at least through fiscal year 2005
             because the Army used higher than average civilian salary costs to
             compute its savings. Further, long-term annual recurring savings to the
             Army are likely to be as much as 17 percent lower than expected since
             some planned personnel reductions reflect positions funded by non-Army
             organizations for work done on a reimbursable basis.

             Because most of the Quadrennial Defense Review reductions will occur
             between 2001 to 2004, much of the impact on workload and readiness is
             yet to be determined. Army Materiel Command officials, while expressing
             concerns about challenges they face in meeting the reductions, could not
             point to any significant adverse effects to date other than on employee
             morale. Command officials stated that the ongoing reductions continue to
             have only marginal impacts on operations, which they have dealt with so
             far through various reorganizations and reengineering actions. The
             Command also faces additional personnel reductions beyond those
             mandated by the Quadrennial Defense Review.

             We are not making any recommendations in this report because it appears
             that the Command has enough options to help achieve its reduction goals
             by fiscal year 2004. However, as we noted, the savings estimates
             associated with these reduction goals are overstated.


             AMC is responsible for weapon systems development, advanced research,
Background   and the maintenance and distribution of spare parts. With its headquarters
             in Alexandria, Virginia, AMC accomplishes its mission through nine major
             subordinate commands that direct the operation of numerous
             activities—depots, arsenals, ammunition plants, laboratories, test
             activities, and procurement operations. AMC is funded through direct
             appropriations and reimbursements from the Army’s Working Capital
             Fund,1 other Army activities, and non-Army sources. Approximately
             63 percent of AMC’s civilian positions are funded through reimbursements.

             In May 1997, the Department of Defense (DOD) completed the QDR, a
             comprehensive review of national security threats, risks, and
             opportunities facing the United States to 2015. According to DOD, this

             1
              Under this funding arrangement, applicable to a variety of business activities, an Army activity, such
             as AMC, sells goods and services on an inter and intraservice basis on predetermined rates designed to
             recoup operating costs. Working capital fund customers pay for the goods and services, primarily with
             operation and maintenance funds appropriated by Congress.



             Page 2                                           GAO/NSIAD-99-123 Quadrennial Defense Review
                           B-281817




                           review intended to provide a blueprint for a strategy-based, balanced, and
                           affordable program. The review directed the Army to reduce 17,366
                           civilian positions. The Army allocated 8,530 of these reductions to AMC.
                           The Army assumed that AMC could eliminate 6,980 positions by conducting
                           public/private competitive sourcing studies2 and another 1,550 positions
                           through implementing other organizational efficiencies. Appendix II shows
                           the planned reductions among AMC subordinate organizations.

                           The QDR reductions continue the downsizing of AMC that started in 1989.
                           Between fiscal year 1989 and 1997, AMC reported reducing the number of
                           its civilian positions from about 102,000 to 62,000, or 38 percent, as part of
                           DOD’s overall downsizing. Prior to the QDR, the Army had planned to reduce
                           AMC to about 56,000 civilians by fiscal year 2003. The QDR will reduce AMC
                           to about 48,000 positions by fiscal year 2004. In addition to reductions
                           called for in the QDR, the Army plans to reduce AMC civilian authorizations
                           by another 2,000 positions between fiscal year 2000 and 2005.


                           The Army’s plan for achieving its AMC personnel reduction goals are still
Plan for Achieving the     evolving. However, given the large number of initiatives, there should be
Personnel Reductions       sufficient opportunities to achieve the reductions. The Army originally
Is Evolving                planned to achieve most of AMC’s QDR reductions (about 7,000) through
                           competitive sourcing studies. However, the number of positions initially
                           considered suitable for such studies is now considerably smaller and the
                           Army is still uncertain about how many positions will actually be studied.
                           Consequently, AMC now expects to achieve most of its personnel
                           reductions through other initiatives to streamline its organization and
                           achieve operational efficiencies. AMC is making its initial QDR reductions
                           during fiscal year 1999 and 2000; however, some of the reductions are
                           expected to take longer to implement than initially anticipated.3 Most,
                           about 80 percent, of the total reductions are expected to occur between
                           fiscal year 2001 and 2004.


Basis for the Reductions   To achieve the QDR reductions, the Army assumed that about 35,000 of
Has Changed                AMC’s civilian positions could be subjected to competitive sourcing studies.
                           However, in October 1998, after completing action on a DOD directive that

                           2
                           These competitive sourcing studies were to be done employing the Office of Management and Budget
                           Circular A-76 process. See appendix I for a detailed description of the A-76 process.
                           3
                            We have reported that while we believe that competitive sourcing studies are likely to produce
                           savings, we have indicated some uncertainties exist about the magnitude of long-term savings. See
                           DOD Competitive Sourcing: Questions About Goals, Pace, and Risk of Key Reform Initiative
                           (GAO/NSIAD-99-46, Feb. 22, 1999).



                           Page 3                                          GAO/NSIAD-99-123 Quadrennial Defense Review
B-281817




all components uniformly reassess the number of positions that were
commercial in nature and that could be subject to competitive sourcing
studies,4 the Army concluded that only about 19,000 AMC positions were
clearly suitable for study. It found that nearly 11,000 additional positions
might be candidates for study but first required additional assessment.
This further assessment is expected to be completed by November 1999.

In the short term, AMC was left with a still substantial study universe of
about 19,000 positions. Of that universe, nearly 2,400 positions were
already under study. Since then, studies of about 6,800 additional positions
have begun. AMC officials have expressed some uncertainty about the
extent to which studies of the remaining positions will be made because
they include significant numbers of secretarial and administrative
positions as well as some positions in functions that AMC plans to seek
waivers to Circular A-76 requirements.

While competitive sourcing studies remains a key tool to help achieve the
planned reductions, AMC has turned its attention to other ways of achieving
the personnel reductions. These initiatives can result in significant
reductions and include such actions as position elimination, organizational
realignments, and reengineering of functions. The range of initiatives AMC
expects to use to achieve its reductions and the year the reductions are
expected to occur are shown in table 1.




4
 Defense Reform Initiative Directive 20 required DOD organizations to review all of their positions
involved in performing commercial activities and identify those that could be subject to a competitive
sourcing study.



Page 4                                           GAO/NSIAD-99-123 Quadrennial Defense Review
                                               B-281817




Table 1: AMC Initiatives to Achieve the QDR Reductions by Fiscal Year
Initiative                                           1999       2000                  2001            2002    2003      2004        Total
Redesign the commodity commands                               18                       344             761     849                 1,972
Restructure the research, development, and
engineering centers                                                                                     13     885       669       1,567
Compete functions at Watervilet, Pine Bluff, and
Rock Island arsenals                                                                                   630                           630
Compete functions in the Test and Evaluation
Command                                                                                545                                           545
Reengineer selected functions                                 46           72          196             117      14        79         524
Compete base operations in the Industrial
Operations Command                                                        469                           17                           486
Merge the Chemical and Biological Defense
Command and the Soldier Systems Command                         2         131                           20      91       178         422
Redesign the Army Research Laboratory                           3                                      120     100       194         417
Decentralize and transfer depot management from
the Industrial Operations Command to individual
commodity commands                                              1         378                           21                           400
Reengineer the Logistics Support Activity                                              111             140      59                   310
Privatize software activities in the
Communications-Electronics Command                                        257                                                        257
Reengineer three analytical activities                                                 148              84                           232
Reduce test requirements in the Test and
Evaluation Command                                                                     185                                           185
Compete the Test, Measurement, Diagnostics,
and Equipment Activity                                                    178                                                        178
Consolidate war reserve sites in Europe                                   153                           22                           175
Compete base operations in the Aviation and
Missile Command, the Tank-automotive and
Armaments Command and the
Communications-Electronics Command                                         24            83             25                           132
Compete positions involved in ammunition
demilitarization                                                           66                                                         66
Reduce positions at various ammunition plants                                4            9             19                            32
Total                                                         70        1,732        1,621            1,989   1,998    1,120       8,530
Percenta                                                        1          20            19             23      23        13         100
                                               a
                                                Percent figures do not add exactly due to rounding.

                                               Source: Army data.




                                               Page 5                                         GAO/NSIAD-99-123 Quadrennial Defense Review
                            B-281817




                            AMC plans to restructure its commodity commands through competitive
                            sourcing studies, privatization of selected functions, and reengineering
                            business processes. The commodity commands include the Aviation and
                            Missile Command, the Communications-Electronics Command, and the
                            Tank-automotive and Armaments Command. Likewise, the research,
                            development, and engineering restructure initiative involves reorganizing
                            and restructuring the research centers to focus on critical core
                            competencies as well as conducting competitive sourcing studies on
                            selected functions. The initiative involves the same commands as well as
                            the Soldier and Biological Chemical Command.

                            In addition to these initiatives, the Army is considering a much broader
                            reorganization of AMC. However, details of this proposed reorganization
                            were not made available to us; therefore, we were unable to assess any
                            potential impact such a reorganization may have upon existing personnel
                            requirements.


Reductions in Fiscal Year   AMC expects to eliminate about 1,800 positions during fiscal years 1999 and
1999 and 2000               2000. In fiscal year 1999, it plans to eliminate 70 positions of which, about
                            half will be obtained by eliminating vacant positions in headquarters. The
                            remaining 1,732 positions are to be eliminated in fiscal year 2000 through a
                            combination of factors, including competitive sourcing studies and
                            ongoing initiatives to decentralize and transfer responsibility for managing
                            the depots from the Industrial Operations Command to individual
                            commodity commands, consolidate war reserve sites in Europe, and
                            merge two commands.5 However, some of the initiatives may not be
                            implemented during fiscal year 2000 as planned. Table 2 shows that 713, or
                            41 percent, of the 1,732 reductions planned for fiscal year 2000 could be
                            delayed and a final decision has not been made regarding another 257
                            positions.




                            5
                             The Chemical and Biological Defense Command and the Soldier Systems Command were merged into
                            the Soldier and Biological Chemical Command.



                            Page 6                                      GAO/NSIAD-99-123 Quadrennial Defense Review
                                            B-281817




Table 2: Status of Initiatives to Achieve
QDR Reductions in Fiscal Year 2000                                                                   Number of positions
                                                                                                                       Decision
                                            Initiative                                           On time   Delayed     pending
                                            Competitive sourcing:
                                             Base operations                                                    469
                                             Test, measurement, diagnostics, and evaluation                     178
                                             Ammunition demilitarization                                         66
                                            Privatize software activities                                                   257
                                            Transfer responsibility for depot management             378
                                            Consolidate war reserve sites                            153
                                            Merge two commands                                       131
                                            Other                                                    100
                                            Total                                                    762        713         257
                                            Percent                                                   44         41          15
                                            Source: Our analysis of Army data.



                                            The primary reason some initiatives are being delayed is that competitive
                                            sourcing studies are taking longer to complete and implement than
                                            planned. AMC officials stated that they are assessing options to deal with
                                            the impact of these delayed studies. AMC also planned to eliminate 24
                                            positions in fiscal year 2000 through competitive sourcing studies of some
                                            base operations functions in the Aviation and Missile and the
                                            Tank-automotive and Armaments Commands. However, officials at these
                                            commands stated that they now plan to eliminate vacant positions rather
                                            than conduct the studies.

                                            As shown in table 2, AMC plans to privatize some software design activities
                                            in the Communication-Electronics Command that would eliminate 257
                                            positions. Under this initiative, the Army wants to modernize its wholesale
                                            logistics functions by awarding a long-term contract to a single vendor that
                                            will (1) operate the Army’s existing wholesale logistics software system,
                                            (2) reengineer the wholesale logistics business processes, and
                                            (3) customize a commercial off-the-shelf software system, which it will
                                            operate. However, to implement this initiative, AMC sought a waiver to
                                            Circular A-76 requirements. At the time we completed our work, the Army
                                            had not approved or disallowed the waiver.




                                            Page 7                                   GAO/NSIAD-99-123 Quadrennial Defense Review
                             B-281817




Reductions in Fiscal Years   AMC has identified initiatives to eliminate the remaining 6,728 positions
2001 to 2004                 between fiscal year 2001 and 2004. Most of these reductions depend
                             primarily on AMC’s ability to restructure the commodity commands,
                             redesign the research, development and evaluation centers, and complete
                             competitive sourcing studies on its arsenals. These three initiatives
                             account for 4,174, or 62 percent, of the planned reductions.

                             AMC plans to eliminate 1,972 positions under the initiative to redesign its
                             commodity commands. Our work at two of the three commodity
                             commands indicates that plans to achieve the reductions are still being
                             developed. For example, the Tank-automotive and Armaments Command
                             plans to reengineer its business processes and implement an integrated
                             data environment to absorb the reductions. According to Tank-automotive
                             and Armaments officials, the Command plans to implement its new
                             organizational structure in fiscal year 1999, and then start to identify and
                             prioritize the various business practices to be reengineered. The Aviation
                             and Missile Command plans to achieve its reductions primarily through
                             implementing the prime vendor support concept6 on selected systems. The
                             Apache was selected as the first system; however, the implementation plan
                             is still under review within the Army.7 An Aviation and Missile Command
                             official stated that the Command’s ability to achieve the reductions relies
                             primarily on replicating the Apache concept to other weapon systems.

                             Another major initiative involves plans to redesign the research,
                             development, and engineering centers and eliminate 1,567 positions. To
                             achieve its reductions, the Aviation and Missile Command plans to
                             combine the aviation and missile research centers and eliminate positions
                             at some satellite locations and some performing lower priority work.
                             Aviation and Missile Command officials stated efforts are underway to
                             prioritize their workload. Likewise, the Tank-automotive and Armaments
                             Command plans to achieve efficiencies by consolidating similar functions
                             between its two research centers, as well as through projected decreases
                             in workload.

                             AMCexpects to eliminate 630 positions in fiscal year 2002 by conducting
                             competitive sourcing studies at its three arsenals. However, Army

                             6
                              Prime vendors typically are contractors that buy inventory from a variety of suppliers, store it in
                             commercial warehouses, and ship it to customers when ordered. In the case of the Apache helicopter,
                             the prime vendor concept is much different in that a contractor provides all logistics support along
                             with continuous product improvement and modernization.
                             7
                              Much controversy and uncertainty surround this initiative in terms of its cost-effectiveness and
                             impact on other organizations and entities such as the Defense Logistics Agency and the Army
                             Working Capital Fund. It is also the subject of one of our reviews.



                             Page 8                                           GAO/NSIAD-99-123 Quadrennial Defense Review
                        B-281817




                        decisions since the QDR could affect the positions to be studied. For
                        example, AMC planned to study about 2,600 positions at the Rock Island
                        and Watervilet Arsenals, which AMC assumed, would achieve about 490 of
                        the 630 planned reductions. However, in fiscal year 2000, the Army plans
                        to reduce the personnel levels at the two arsenals by about 680 positions,
                        which would reduce the study universe to about 1,900 positions. Using the
                        revised universe and AMC’s assumption of a 20-percent saving, only 380
                        positions would be eliminated, or 110 fewer positions than anticipated.
                        AMC officials stated that the Army is considering an option to convert the
                        Watervilet Arsenal to a government-owned contractor-operated facility,
                        which could impact the ongoing competitive sourcing study.


                        The Army expected to achieve cumulative savings of an estimated
Savings Are Likely to   $1.4 billion between fiscal year 1999 and 2004 and an estimated
Be Less Than            $589 million in annual recurring savings thereafter from QDR civilian
Anticipated and Take    reductions in AMC. While these reductions are expected to achieve savings,
                        our work indicates that savings in both the short and long term are likely
Longer to Be Realized   to be less than expected and take longer to be realized. The savings totals
                        will be lower in the short term because not all of the investment costs
                        required to achieve the reductions were considered. Also, some of the
                        savings programmed for fiscal year 2000 will be delayed because
                        competitive sourcing studies that are underway are taking longer to
                        complete and implement than planned. The Army used higher than
                        average civilian salary costs to compute the estimated savings. Further,
                        not all of the savings will accrue to the Army because some positions to be
                        eliminated are funded by non-Army activities.

                        The estimated savings did not include all the investment costs required to
                        implement some initiatives. This will delay savings being achieved within
                        the estimated time frames. For example, the Tank-automotive and
                        Armaments Command requires $35 million to implement an integrated
                        data environment as part of its plan to perform its mission with less
                        personnel. Command officials stated that these costs are required for
                        contractor support of network and database management. Likewise, the
                        Soldier and Biological Chemical Command plans to install new security
                        equipment at various sites, which would enable it to reduce the number of
                        security guards. According to the Command’s Director for Resource
                        Management, the current estimate for the technology improvements is
                        $10 million. Finally, the Army War Reserve Support Command estimates
                        that it will cost $2.5 million to move equipment to consolidate war reserve
                        storage sites in Europe.



                        Page 9                              GAO/NSIAD-99-123 Quadrennial Defense Review
B-281817




The Army also did not fully calculate the personnel separation costs
associated with the QDR reductions in AMC. On the basis of its average
separation cost8 of $21,000 per employee, the Army’s Office of Program
Analysis and Evaluation programmed separation costs of about
$150 million for 6,980 employees, or 20 percent of the study universe.
Should AMC increase its competitive study candidates, these costs could
increase significantly. Assuming that the private sector continues to win
competitions at the historic rate of 50 percent, AMC could transfer work
involving between 9,500 and 15,000 positions to the private sector.

The Army expected to save about $21 million in fiscal year 2000 by
implementing the results of various competitive sourcing studies. As
previously discussed, these studies may not be completed during fiscal
year 2000, which will delay the savings. AMC officials stated that they are
reviewing options to fund the affected positions until the studies are
implemented.

The Army used average salary costs for each fiscal year to estimate the
savings. The Army assumed that after accounting for reductions, AMC’s
average civilian salary costs would still increase 2 percent per year
between fiscal year 1999 and 2005, except in fiscal year 2001, when the
average salary would increase by 14 percent. When we brought this to the
attention of Army officials, they could not explain the reason for this
increase but stated that they are reviewing the methodology used to
compute average civilian salary. Had the Army applied a 2-percent
increase consistently through fiscal year 2005, we estimate that the total
savings would be reduced by about $52 million.

Approximately $303.6 million, or 52 percent, of the estimated recurring
savings is based on eliminating positions that are directly funded by AMC.
An additional $182.6 million, or 31 percent, of the estimated recurring
savings is based on eliminating positions funded by other Army
organizations; these savings will accrue to the Army but not specifically to
AMC. The remaining $103 million, or 17 percent, of the estimated recurring
savings is based on eliminating AMC positions that are essentially funded by
non-Army organizations through reimbursements for services provided.
While this will reduce personnel levels in AMC, the dollar savings will
accrue to other organizations. For example, the Army is reimbursed for
missile tests that it conducts for the Air Force or the Navy. According to
AMC officials, the personnel reductions should not affect the reimbursable


8
 This average covers the costs of voluntary early retirement, voluntary separation incentives, and
involuntary separations through reduction-in-force procedures.



Page 10                                          GAO/NSIAD-99-123 Quadrennial Defense Review
                       B-281817




                       work because they expect to continue to do the work with fewer
                       personnel.


                       Since most of the QDR reductions will occur between fiscal year 2001 and
Impact of Reductions   2004, the impact on workload and readiness of these future reductions is
Has Been Limited       yet to be determined. AMC officials, while expressing concerns about
                       challenges they face in meeting the QDR and ongoing reductions, could not
                       point to any significant effects to date other than employee morale. AMC
                       officials stated that the ongoing reductions continue to have only marginal
                       impacts on operations, which they have dealt with so far through various
                       reorganizations and reengineering actions.

                       The majority of the reductions in fiscal year 2000 should not impact
                       workload because they are based on competitive sourcing studies and
                       efforts to streamline commands. Our prior work has shown that initiatives
                       such as competitive sourcing studies and others that emphasize identifying
                       more efficient organizations often provide opportunities to complete
                       existing workload with fewer employees. In addition, some of the out-year
                       reductions should inherently have no impact on workload because they
                       are based on projected workload decreases. For example, the Soldier and
                       Biological Chemical Command’s plan to eliminate 178 positions in the
                       chemical agent destruction activity is based on projected decreases in
                       workload in fiscal year 2004. Similarly, the Tank-automotive and
                       Armaments Command’s plan to eliminate about 300 positions is based on
                       projected workload decreases in fiscal years 2003 and 2004.

                       The QDR reductions do not represent the latest reductions to AMC’s
                       personnel. After the QDR, the Army reduced AMC’s civilian staffing by
                       another 2,000 positions between fiscal year 2000 and 2005. Furthermore,
                       the Army Vice Chief of Staff established a team to identify options to make
                       AMC more efficient. As indicated earlier, we were not able to obtain any
                       information on the options being considered.


                       AMC has identified various initiatives to achieve the QDR reductions;
Conclusions            however, plans for some of the initiatives are yet to be finalized. Even so,
                       it appears that AMC has enough options to help achieve its reduction goals
                       by fiscal year 2004. However, the reductions will save less than estimated.
                       Delays in initiating some of the planned initiatives and not fully accounting
                       for the investment costs required to implement these actions will likely
                       delay the onset of planned savings. Additionally, other factors are likely to



                       Page 11                             GAO/NSIAD-99-123 Quadrennial Defense Review
                  B-281817




                  mean less overall savings than initially estimated. Lastly, AMC officials state
                  that the reductions to date have had only marginal impact on performance,
                  which they have been able to deal with. However, it is too early to assess
                  the impact for about 80 percent of the reductions that are scheduled to
                  occur from fiscal year 2001 through 2004.


                  We requested comments on a draft of this report from the Secretary of
Agency Comments   Defense. On March 30, 1999, Office of the Secretary of Defense officials
                  told us that the Department concurred with the report without additional
                  comments.


                  To obtain information on AMC’s plans to achieve the QDR reductions, we
Scope and         interviewed officials and reviewed documents at AMC Headquarters, the
Methodology       Aviation and Missile Command, Huntsville, Alabama; the Tank-automotive
                  and Armaments Command, Warren, Michigan; the Industrial Operations
                  Command, Rock Island, Illinois; the Soldiers Biological and Chemical
                  Command, Aberdeen, Maryland; and the Test and Evaluation Command,
                  Aberdeen, Maryland. To obtain information on the estimated savings, we
                  interviewed officials and reviewed documents from the Army’s Office of
                  Program, Analysis and Evaluation and AMC’s Office of Resource
                  Management. We obtained information on additional investment costs
                  from officials in the Tank-automotive and Armaments Command, the
                  Soldiers Biological and Chemical Command, and the Army War Reserve
                  Support Command. To obtain information on the impact of the reductions
                  on workload and readiness, we interviewed AMC’s Chief of Staff and
                  officials at the various commands visited who were responsible for
                  implementing the initiatives. In addition, we reviewed the impact
                  statements that AMC headquarters prepared for the QDR initiatives.

                  We conducted our review from December 1998 to February 1999 in
                  accordance with generally accepted government auditing standards.


                  We are sending copies of this report to the Honorable William S. Cohen,
                  Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army;
                  the Honorable William J. Lynn, Under Secretary of Defense (Comptroller);
                  and the Honorable Jacob Lew, Director, Office of Management and
                  Budget. Copies will also be available to others upon request.




                  Page 12                              GAO/NSIAD-99-123 Quadrennial Defense Review
B-281817




If you or your staff have any questions concerning this report, please
contact me at (202) 512-8412 or my Associate Director, Barry Holman, at
(202) 512-5581. Major contributors to this report were William Crocker,
Michael Kennedy, and Richard Irving.




David R. Warren, Director
Defense Management Issues




Page 13                            GAO/NSIAD-99-123 Quadrennial Defense Review
B-281817




List of Congressional Committees

The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Ted Stevens
Chairman
The Honorable Daniel Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

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

The Honorable Jerry Lewis
Chairman
The Honorable John Murtha
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives




Page 14                            GAO/NSIAD-99-123 Quadrennial Defense Review
Page 15   GAO/NSIAD-99-123 Quadrennial Defense Review
Contents



Letter                                                                                              1


Appendix I                                                                                         18
The A-76 Process
Appendix II                                                                                        22
Army Materiel
Command
Quadrennial Defense
Review Reduction
Goals by Organization
Tables                  Table 1: AMC Initiatives to Achieve the QDR Reductions by Fiscal            5
                          Year
                        Table 2: Status of Initiatives to Achieve QDR Reductions in Fiscal          7
                          Year 2000


Figure                  Figure I.1: Overview of the A-76 Process                                   19




                        Abbreviations

                        AMC        Army Materiel Command
                        DOD        Department of Defense
                        QDR        Quadrennial Defense Review


                        Page 16                            GAO/NSIAD-99-123 Quadrennial Defense Review
Page 17   GAO/NSIAD-99-123 Quadrennial Defense Review
Appendix I

The A-76 Process


              In general, the A-76 process consists of five key activities: (1) developing a
              performance work statement and quality assurance surveillance plan;
              (2) conducting a management study to determine the government’s most
              efficient organization; (3) developing an in-house government cost
              estimate for the most efficient organization; (4) issuing a Request for
              Proposals or Invitation for Bids; and (5) evaluating the proposals or bids
              and comparing the in-house estimate with a private-sector offer or an
              interservice support agreement and selecting the winner of the cost
              comparison. Additionally, appeals may be submitted.

              Figure I.1 shows an overview of the process. The solid lines indicate the
              process used when the government issues an Invitation for Bids requesting
              firm bids on the cost of performing a commercial activity. This type of
              process is normally used for more routine commercial activities such as
              grass-cutting or cafeteria operations, where the work process and
              requirements are well defined. The dotted lines indicate the additional
              steps that take place when the government wants to pursue a negotiated,
              “best value” procurement. While it may not be appropriate for use in all
              cases, this type of process is often used when a commercial activity
              involves high levels of complexity, expertise, and risk.




              Page 18                              GAO/NSIAD-99-123 Quadrennial Defense Review
                                                      Appendix I
                                                      The A-76 Process




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




                                                                  Prepare in-house
                                                                  cost estimate




                                    MEO                                                                                 Revise
                                                                  Prepare technical             Revise
                                    management study                                                                    in-house
                                                                  proposal                      MEO
                                                                                                                        cost estimate




   Issue performance
   work statement
   and RFP or IFB
                                                                                           Compare selected
                                                                Conduct technical          Best Value and MEO
                                                                evaluation of MEO          technical proposals



                                     Accept                     Conduct technical              Compare
                                                                                                                         Select lowest
                                     contractor                 evaluation of                  costs/select
                                                                                               contractor                cost alternative
                                     bids/proposals             bids/proposals




          Most Efficient Organization (MEO) activities

          Government technical evaluation activities

          Process for invitation for bid (IFB)

          Additional steps required for request for
          proposals (RFP)




                                                      Source: Air Force Air Education and Training Command documents.




                                                      Page 19                                     GAO/NSIAD-99-123 Quadrennial Defense Review
Appendix I
The A-76 Process




The circular requires the government to develop a performance work
statement. This statement, which is incorporated into either the Invitation
for Bids or the Request for Proposals, serves as the basis for both
government estimates and private sector offers. If the Invitation for Bid
process is used, each private sector company develops and submits a bid,
giving its firm price for performing the commercial activity. While this
process is taking place, the government activity performs a management
study to determine the most efficient and effective way of performing the
activity with in-house staff. On the basis of this “most efficient
organization,” the government develops a cost estimate and submits it to
the selecting authority. The selecting authority concurrently opens the
government’s estimate and the bids of all private sector firms.

According to Office of Management and Budget’s A-76 guidance, the
government’s in-house estimate wins the competition unless the private
sector’s offer meets a threshold of savings that is at least 10 percent of
direct personnel costs or $10 million over the performance period. The
Office of Management and Budget established this minimum cost
differential to ensure that the government would not contract out for
marginal estimated savings.

If the Request for Proposals—best value process—is used, the Federal
Procurement Regulation and the A-76 supplemental handbook require
several additional steps. The private sector offerors submit proposals that
often include a technical performance proposal and a price. The
government prepares an in-house management plan and a cost estimate
that are based strictly on the performance work statement. On the other
hand, private sector proposals can offer a higher level of performance or
service.

The government’s selection authority reviews the private sector proposals
to determine which one represents the best overall value to the
government based on such considerations as (1) performance levels,
(2) proposal risk, (3) past performance, and (4) cost to do the work. After
this review is completed, the selection authority prepares a written
justification supporting its decision. This justification includes the basis
for selecting a contractor other than the one that offered the lowest price
to the government. Next, the authority evaluates the government’s offer
and determines whether it can achieve the same level of performance and
quality as the selected private sector proposal. If not, the authority asks
the government to change its estimate to meet the performance standards
accepted by the authority. This ensures that the in-house cost estimate is
based upon the same scope of work and performance levels as the best


Page 20                             GAO/NSIAD-99-123 Quadrennial Defense Review
Appendix I
The A-76 Process




value private sector offer. After determining that the offers are based on
the same level of performance, the cost estimates are compared. As with
the Invitation for Bids process, the work will remain in-house unless the
private offer is (1) 10 percent less in direct personnel costs or
(2) $10 million less over the performance period.

Following an A-76 cost comparison decision, participants in the cost
comparison may appeal the selection authority’s decision if they believe
the government has not complied with the requirements and procedures of
A-76 or question the costs entered by the government on the applicable
cost comparison form.




Page 21                             GAO/NSIAD-99-123 Quadrennial Defense Review
Appendix II

Army Materiel Command Quadrennial
Defense Review Reduction Goals by
Organization

                                                                                            Pre-QDR
                                                                                          fiscal year
                                                                              QDR               2003      Percent
              Organization                                                reduction          baseline   reduction
              Industrial Operations Commanda                                   1,819          19,510            9
              Tank-automotive and Armaments Command                            1,391           7,480           19
              Communications-Electronics Command                               1,322           7,149           19
              Aviation and Missile Command                                     1,317           7,107           19
              Test and Evaluation Command                                           730        4,860           15
              Chemical and Biological Defense Commandb                              448        2,701           17
              Army Research Laboratory                                              417        2,370           18
              Logistics Support Activity                                            310          739           42
              Army Materiel Command Headquarters                                    200          784           26
              Army Materiel Systems Analysis Activity                               143          297           48
                                             b
              Soldier System Command                                                131          954           14
              Simulation and Training Command                                        96          510           19
              Separate Reporting Activities                                          74          348           21
              Logistics Integrated Activity                                          57           92           62
                                                      c
              Management Engineering Activity                                        32           66           48
              U.S. Army Security Assistance Command                                  31          541            6
              Test Directorate                                                       12           62           19
              Army Research Officed                                                  0           115            0
              Total                                                            8,530          55,685           15
              a
               This command includes personnel at the five depots that were later transferred to other major
              subordinate commands in the Army Materiel Command.
              b
                  These commands were later merged into the Soldier and Biological Chemical Command.
              c
              This activity was later combined with the U.S. Army Material Systems Analysis Activity.
              d
                  This office was later merged with the Army Research Laboratory.

              Source: Army data.




(709385)      Page 22                                          GAO/NSIAD-99-123 Quadrennial Defense Review
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested