oversight

Future Years Defense Program: How Savings From Reform Initiatives Affect DOD's 1999-2003 Program

Published by the Government Accountability Office on 1999-02-25.

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

                  United States General Accounting Office

GAO               Report to the Chairman and Ranking
                  Minority Member, Committee on Armed
                  Services, House of Representatives


February 1999
                  FUTURE YEARS
                  DEFENSE PROGRAM

                  How Savings From
                  Reform Initiatives
                  Affect DOD’s
                  1999-2003 Program




GAO/NSIAD-99-66
      United States
GAO   General Accounting Office
      Washington, D.C. 20548                                                                                       Leter




      National Security and
      International Affairs Division                                                                               Leter




      B-281980

      February 25, 1999

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

      In its report on the National Defense Authorization Act for Fiscal Year 1999,
      the House Committee on Armed Services1 noted that prior Department of
      Defense (DOD) reform initiatives had not generated the anticipated savings
      and had created difficulties because of premature budget reductions.2
      Accordingly, the report directed that we provide answers to a series of
      questions pertaining to the support for savings and personnel reductions
      contained in DOD’s fiscal year 1999 budget request and out-year budget
      plans. This report addresses the following questions:

      • What savings in DOD’s fiscal years 1999-2003 Future Years Defense
        Program (FYDP)3 were the result of the Department’s Defense Reform
        Initiatives (DRI)?
      • To what extent were the savings and personnel reductions from
        competitive sourcing4 in the 1999-2003 FYDP based on ongoing or
        planned studies of functions specifically identified under Office of
        Management and Budget (OMB) Circular A-76, and what percentage of
        the current costs of performing those functions were included from the
        projected savings from these studies?
      • Did Defense components outsource activities that included inherently
        governmental functions, without allowing civilian employees to



      1
          Formerly the House National Security Committee.
      2
          House Report 105-532, May 12, 1998.

      3The FYDP is an authoritative record of current and projected force structure, costs, and personnel
      levels approved by the Secretary of Defense. In its annual FYDP documents, which in accordance with
      10 U.S.C. 221 have been provided to the Congress since 1988, DOD presents its estimated expenditures
      and appropriations needs for the budget year for which funds are being requested, for the previous
      2 years, and for at least the following 4 years. The fiscal year 1999 FYDP supports the President’s fiscal
      year 1999 budget request.

      4
        While the phrase outsourcing is sometimes used, we chose to use competitive sourcing to reflect
      competition between the public and private sector.




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                       compete under Circular A-76 procedures, or without following the study
                       and notification requirements of 10 U.S.C. 2461?



Results in Brief   DOD expects savings from individual Defense Reform Initiatives, but has
                   not incorporated specific savings in the 1999-2003 FYDP from these
                   initiatives, except in the areas of competitive sourcing and estimates
                   relating to future base realignment and closure (BRAC) decisions. DOD’s
                   1999-2003 FYDP incorporated $6.2 billion of estimated savings from
                   competitive sourcing between fiscal year 1997 and 2003, but these
                   estimated savings do not fully account for up-front investment costs, which
                   could reduce the amount of actual savings in the short term. The FYDP
                   does provide a fuller estimate of the impact of investment costs associated
                   with BRACs. For example, the 1999-2003 FYDP offsets estimated BRAC
                   savings with implementation costs and comes up with net costs of
                   $832 million for fiscal year 2002 and $1.45 billion for fiscal year 2003. While
                   DOD has requested additional BRAC rounds, the Congress has not
                   authorized them.5 The Office of the Secretary of Defense expects its DRIs
                   to reduce personnel requirements but has not required the services to link
                   specific reductions with individual initiatives. Some services, however,
                   have linked projected personnel reductions with their competitive sourcing
                   studies.

                   Savings from competitive sourcing reflected in the 1999 FYDP were not
                   linked to specific functions under study or targeted for future studies. In
                   addition, DOD does not yet have the systems in place that can provide
                   reliable cost information needed to precisely identify savings.
                   Consequently, it is not feasible to accurately identify current costs of
                   functions to be studied or the potential savings as a percentage of these
                   costs. According to DOD, savings estimates incorporated in the FYDP
                   represented broad projections based on the numbers of positions expected
                   to be studied and historic savings data.6 Our work has shown that historic
                   savings estimates may have important limitations and may not accurately



                   5DOD included an estimate of the net of future BRAC costs and savings in its 1999-2003 FYDP, as it was
                   seeking authority from the Congress for additional BRAC rounds.

                   6
                     The number of positions has generally increased over time, but appears to have fluctuated much more
                   than the projected savings. For example, the projected cumulative savings of approximately $6 billion
                   has remained in that range for the past 2 years, while the number of positions expected to be studied
                   has ranged from a low of about 171,000 to a high of 237,000 and was only recently changed to 229,000 by
                   fiscal year 2005.




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             indicate likely current and future savings. Study plans of most Defense
             components have evolved over time, but in many cases they have not
             linked positions to be studied to specific functions and locations. Firm
             savings estimates probably will not be possible until individual studies are
             completed. Even then, these estimates would be subject to change.

             Procurement and commercial activities data systems do not identify the
             extent to which Defense components may be outsourcing functions
             without complying with Circular A-76 procedures or 10 U.S.C. 2461
             congressional reporting requirements. Currently, such cases can be
             identified only when they are specifically raised by affected parties.



Background   In May 1997, DOD completed a comprehensive review of national security
             threats, risks, and opportunities facing the United States to 2015. This
             review, known as the Quadrennial Defense Review (QDR), was intended to
             examine America’s defense needs and provide a blueprint for a strategy-
             based, balanced, and affordable defense program. The QDR noted that
             DOD had reduced active duty personnel by 32 percent between 1989 and
             1997 while reducing personnel performing infrastructure functions by only
             28 percent. The report called for additional reductions in both military and
             civilian personnel. Our July 1998 report on the 1999-2003 FYDP noted that
             the services planned to reduce military and civilian personnel by 175,000
             and save $3.7 billion by 2003. Our recent reviews of planned Defense
             personnel reductions resulting from the QDR and the 1999-2003 FYDP
             raised questions about DOD’s ability to achieve some of these reductions
             and savings.7

             The changes in military strategy and capabilities enunciated in the QDR
             and other reports have often been referred to as a revolution in military
             affairs. However, the QDR also recognized that DOD must undergo a
             similar revolution in its business affairs. To that end, the Secretary of
             Defense chartered a study effort that resulted in the November 1997 DRI
             report. The report emphasized the need to reduce excess Cold War
             infrastructure to free up resources for modernization. The report identified
             numerous initiatives to reengineer business practices, consolidate
             organizations, eliminate unneeded infrastructure through additional base


             7
              Quadrennial Defense Review: Some Personnel Cuts and Associated Savings May Not Be Achieved
             (GAO/NSIAD-98-100, Apr. 30, 1998) and Future Years Defense Program: Substantial Risks Remain in
             DOD’s 1999-2003 Plan (GAO/NSIAD-98-204, July 31, 1998).




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closures, and conduct public/private competitive sourcing studies for
commercial activities. Most of the potential savings identified in the report
were expected to result from BRACs and competitive sourcing studies.
Future BRAC actions were contingent on the Congress enacting legislation
authorizing additional closures, while competitive sourcing studies were to
be completed under the policy guidance of OMB.

The concept of competitive sourcing is not new. Through the 1980s, DOD
encouraged the services and Defense agencies to conduct competitions
between the public and private sectors to determine who would be
responsible for performing selected functions that were being provided by
in-house staff. These competitions were to be done under OMB Circular
A-76. Although DOD’s use of Circular A-76 was limited from the early to
mid-1990s, in 1995 DOD reestablished the competition program in the hope
of obtaining significant savings that could be used to fund modernization
and other priority needs.

Circular A-76 and its supplemental handbook specify a process to develop a
statement that defines the work to be done and a comparison of in-house
costs with contractor costs to determine who should perform the work.
Circular A-76 is limited to competitions for the conversion of recurring
commercial activities. The handbook identifies circumstances under
which detailed cost studies may not be required, such as for the conversion
from performance by military personnel to contractor performance or if
the number of affected civilian positions is below a specific threshold. It
also indicates instances in which Circular A-76 may not apply, such as for
restructured or reengineered functions. Appendix I contains a more
detailed description of the A-76 process.

In addition, several laws affect competitive sourcing. Some, such as
10 U.S.C. 2461 and 2462, affect the process of transferring work currently
being performed by civilian government employees to the private sector.
Section 2461, as amended by the National Defense Authorization Act for
Fiscal Year 1999 (P.L. 105-261), requires an analysis of the activity and a
comparison of the costs of having the activity performed by DOD civilian
employees and by a contractor to determine whether changing to
contractor performance will save money. It also requires that DOD notify
the Congress of this analysis and provide other information before making




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                              a change in performance.8 Section 2462 requires the Secretary of Defense
                              to obtain needed supplies or services from the private sector, if a
                              private-sector source can provide the supply or service at less cost, and
                              establishes criteria for conducting the cost comparison.



FYDP Shows Partial            DOD expects savings from individual DRIs but has not incorporated
                              specific savings from these initiatives in the FYDP, except in the areas of
Costs and Savings             potential BRAC and competitive sourcing. Both have significant up-front
Estimates From BRAC           investment costs that can limit net savings in the short term. The 1999-2003
                              FYDP shows a more complete accounting of these investment costs for
and Competitive               potential BRACs than it does for competitive sourcing, but the latter
Sourcing                      provides the majority of DRI savings incorporated in the FYDP. While
                              personnel reductions are programmed in the 1999-2003 FYDP and are
                              expected to represent a portion of savings from DRIs, DOD has not
                              required the services to link specific personnel reductions to individual
                              initiatives. Some services, however, have projected personnel reductions
                              in conjunction with competitive sourcing studies.


FYDP Shows Net Costs for      We previously reported that BRAC actions can provide the basis for
Early Years of Implementing   significant savings in infrastructure costs. 9 However, while savings can
                              begin to accrue even as costs are being incurred to implement BRAC
Any New BRAC Rounds
                              decisions, it can take several years for net savings to begin accruing on an
                              annual recurring basis. The 1999-2003 FYDP reflects this situation,
                              showing a net cost for projected BRAC decisions between fiscal year 1999
                              and 2003.

                              The 1999-2003 FYDP incorporated some savings from future BRAC rounds,
                              but these savings were offset by implementation costs, resulting in net
                              costs of $832 million for fiscal year 2002 and $1.45 billion for fiscal
                              year 2003. DOD showed these net costs in the FYDP as a Department-level
                              contingency account but did not allocate them to individual services.
                              Beyond the FYDP period, DOD expects the two additional rounds of base


                              8Section 8014 of the DOD Appropriations Act for Fiscal Year 1999 (P.L. 105-262) 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.

                              9
                                Military Bases: Review of DOD’s 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17,
                              Nov. 13, 1998) and Military Bases: Status of Prior Base Realignment and Closure Rounds
                              (GAO/NSIAD-99-36, Dec. 11, 1998).




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                               closures to result in about $3.4 billion in annual savings after the closures
                               are completed and implementation costs have been offset.10

                               We reported in November that DOD’s method of estimating costs and
                               savings for future BRAC rounds was limited, principally because it
                               assumed that savings from future base closures would closely resemble
                               savings from the 1993 and 1995 BRAC rounds, adjusted for inflation. While
                               DOD’s estimate may be appropriate for planning purposes, its precision is
                               limited because the costs of future BRAC rounds might not parallel those of
                               the prior two rounds. Previous base closures frequently involved facilities
                               that were of low military value and were the least costly to implement.
                               Often those closures required the shortest time for savings to offset
                               implementation costs. Generally, DOD did not choose to close facilities
                               that required higher implementation costs or longer periods to recover
                               savings. More precise cost estimates will probably not be available until
                               DOD actually studies implementation scenarios for specific BRAC actions
                               and puts in place more reliable cost accounting systems. However, BRAC
                               history suggests that future implementation costs could be greater than
                               those in previous rounds and the closures could thus take longer to
                               produce net recurring savings.


Projected Competitive          DOD’s 1999-2003 FYDP projected $6.2 billion in savings from competitive
Sourcing Savings Are           sourcing between fiscal year 1997 and 2003. However, as we previously
                               reported, the projected savings do not fully account for the up-front
Significant but Do Not Fully
                               investment costs associated with completing the studies and implementing
Account for Investment         the results. Though recurring savings from competitive sourcing could be
Costs                          substantial in the long term, it will take longer to begin achieving these
                               savings than DOD has projected, and net savings during the 1999-2003
                               period will be less than projected.

                               In formulating their fiscal year 1999 budget, Defense components identified
                               over 200,000 positions that would be subjected to competitive sourcing
                               studies between 1997 and 2003. Table 1 shows the projected savings and
                               the number of positions to be studied by fiscal year as summarized in
                               documents supporting the President’s fiscal year 1999 budget submission.



                               10
                                 Future BRAC savings are expressed in fiscal year 1999 dollars and represent savings expected to
                               recur annually for fiscal year 2012 and beyond, when the two proposed future rounds are projected to
                               be completed. DOD estimated future savings on the assumption that future costs and savings will be
                               similar to those of the 1993 and 1995 rounds.




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Table 1: Programmed Savings and Positions to be Studied for Competitive Sourcing, Fiscal Years 1997-2003

Dollars in millions
                                                             Fiscal year
                              1997           1998           1999            2000            2001              2002      2003           Total
Projected savings              $24            $59           $205            $532         $1,184          $1,831       $2,320        $6,155a
Positions to be studied     26,200       55,300           59,600           45,400         25,400          1,100        1,100       214,100b
                                         a
                                             Includes savings for individual services and Defense agencies.
                                         b
                                          The President’s Fiscal Year 2000 budget request adjusted the number of positions to be studied to
                                         229,000 and extended the years of study out to 2005.
                                         Source: DOD


                                         Our February 1999 report on competitive sourcing goals noted that, like
                                         BRACs, competitive sourcing studies and implementing actions require
                                         up-front investments that should be considered when estimating net
                                         savings.11 We also reported that the estimates of competition savings
                                         provided to the Congress in 1998 had limitations and that several factors
                                         were likely to reduce savings in the short term. We further noted that DOD
                                         had not fully identified the resources associated with the studies or the
                                         personnel separation costs likely to be needed for implementation. The
                                         Navy was the only component that had deducted some estimated
                                         investment costs when calculating the savings presented to the Congress in
                                         DOD’s April 1998 report on competitive sourcing.


Linkage of Specific                      Personnel reductions are programmed in the 1999-2003 FYDP and are
Personnel Reductions With                expected to represent a portion of savings from DRIs. DOD officials told us
                                         that they had not required the services to target specific personnel
Individual Defense Reform
                                         reductions to individual initiatives.
Initiatives Is Limited
                                         The Army programmed a reduction of 9,600 civilian staff on the assumption
                                         that 20 percent of the positions studied would be eliminated. The Army
                                         programmed the 20-percent reduction based on the assumption that the
                                         20-percent savings would result whether the government or a contractor
                                         won the A-76 competitions. Army officials said they made this assumption
                                         because they did not want to be seen as preselecting the winner. The Army
                                         recognizes, however, that it will likely separate more personnel based on


                                         11
                                           DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key Reform Initiative
                                         (GAO/NSIAD-99-46, Feb. 22, 1999).




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the historical trends of contractors winning about 50 percent of the
competitions. The Army did not program any reductions in military
positions as a result of competitive sourcing and planned to make up for
military personnel shortages elsewhere by transferring the military
personnel from positions competed to other military duties.

The Navy and the Marine Corps did not program any potential military or
civilian personnel cuts as a result of competitive sourcing. According to
Navy officials, the Navy’s overall objective is to achieve savings through
competition, and personnel savings are a consequence and not a goal of the
program. Further, Navy officials said they believed that establishing a goal
for personnel reductions would send a negative message to staff and would
affect morale.

The Air Force was more aggressive in identifying personnel reductions
from competitive sourcing and programmed about 26,000 military and
19,300 civilian position reductions between fiscal year 1997 and 2003,
according to its final budget submission. The Air Force’s programmed
reduction of all military positions to be competed was based on the belief
that if a position could be competed, it did not have to be staffed by military
personnel. Generally, the Air Force programmed reductions in civilian
positions on the assumption that private contractors would win 60 percent
of the competitions and that the competitions would last 2 years.

Officials at the Office of the Secretary of Defense (OSD) were aware that
the services used different methods to show the effects of competitive
sourcing on personnel and funding and that the fiscal year 1999 FYDP
reflects these different approaches. The Deputy Under Secretary for
Industrial Affairs and Installations established a task force to ensure that
consistent and comparable approaches are used to estimate personnel and
dollar savings in future budget submissions. Subsequently, the Acting
Director of the Office of the Secretary of Defense’s Program Analysis and
Evaluation Office issued guidance incorporating the task force’s
recommendations, which required Defense components to program both
dollar savings and personnel reductions for the 2000-2005 FYDP. Further,
the DOD Comptroller required Defense components to specifically identify
investment and transition costs and report both gross and net savings in
their fiscal year 2000 budget submissions.




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Competitive Sourcing     Savings from ongoing and future competitive sourcing studies as projected
                         in the 1999 FYDP were the result of broad-based estimates drawn from
Savings Were Projected   previous experience. When the FYDP was being prepared, the projections
Using Historic           were not linked to specific functions then under study or planned for future
                         study. Consequently, it is not feasible to link projected savings with the
Experience But Were      current cost of individual functions. In previous reports, we urged caution
Not Linked to Specific   in the use of historical savings assumptions in the absence of any efforts to
Study Plans              adjust these assumptions for changes that can occur over time and that
                         may reduce savings. The 1999-2003 FYDP was not based on detailed
                         competitive sourcing plans developed by the services and other Defense
                         components. These plans continue to evolve, and specific functions to be
                         studied by location are mostly yet to be determined.


Historic Data Used to    The estimated competitive sourcing savings included in the 1999-2003
Project Future Savings   FYDP were largely based on numbers of positions expected to be studied,
                         average personnel costs per position, and average savings rates estimated
                         by using historical data from prior competitions. Savings rates varied
                         among the services. Our previous work has already shown that there are
                         important limitations to using historical savings estimates because they
                         may not provide an accurate indication of likely future savings.

                         The services’ cost savings estimates ranged between 20 and 30 percent; the
                         Navy projected savings of more than 30 percent where functions performed
                         by military personnel would be competed. These estimates, as shown in
                         table 2, represented what the services believed to be conservative
                         achievable savings based on historical experience.




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Table 2: Comparison of Programmed Savings Rates Used by the Services in the
1999-2003 FYDP

Service                                           Programmed rate of cost savings (percent)
Air Force                                                                                          25
Army                                                                                               20
Marine Corps
• Contractor wins                                                                                  30
• Remains in-house                                                                                 20
Navy                                                                                               31a
aThe  Navy’s programmed savings rate is a composite rate based on the projection that competing
functions currently performed by civilian personnel would yield 25-percent savings and competing
functions currently performed by military personnel would yield 50-percent savings.
Sources: Military services’ data.


While we believe that competitive sourcing competitions are likely to
produce savings, we have previously urged caution when estimating the
amount of savings likely to be achieved.12 The estimates used in the FYDP
are based on savings estimates calculated at the end of competitive
sourcing competitions. These estimates can change over time because of
changes in the scope of the work or mandated wage increases. We
previously noted that continuing budget and personnel reductions could
make it difficult to sustain the levels of previously projected savings. We
also recognized that larger savings are likely to occur when positions filled
by military personnel are converted to civilian or contractor performance.

Finally, we previously noted limitations in DOD’s efforts and capabilities to
track changes in program costs and savings after the results of
competitions are implemented. Actual savings data has not been captured.
Our February 1999 report noted the need for improvements in the
databases used to record the results of competitive sourcing
competitions.13




12Base  Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing
(GAO/NSIAD-97-86, Mar. 11, 1997), Defense Outsourcing: Challenges Facing DOD as It Attempts to Save
Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997), and Defense Management:
Challenges Facing DOD in Implementing Defense Reform Initiatives (GAO/T-NSIAD/AIMD-98-122,
Mar. 13, 1998).

13
     DOD Competitive Sourcing: Results of Recent Competitions (GAO/NSIAD-99-44, Feb. 23, 1999).




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Specific Study Plans      Study plans of most Defense components linking the number of positions
Continue to Evolve        to be studied with specific functions and locations are still evolving, and
                          estimated savings will not be known until the studies are completed.
                          Consequently, it is not feasible to identify the current costs of functions to
                          be studied and their potential savings rates. In our February 1999 report,
                          we concluded that clearer indications of actual savings will require that
                          Defense components develop mechanisms to track actual savings over
                          time in order to validate continuing savings from completed competitions.

                          None of the services based fiscal year 1999 budgets or 1999-2003 FYDP
                          submissions on a completed multiyear study plan for their competitive
                          sourcing program, although the Air Force was furthest along. Our
                          February 1999 report on competitive sourcing goals noted that most
                          Defense components lacked detailed plans identifying the numbers of
                          positions by function expected to be studied over the next few years.
                          Detailed planning to implement the program has been largely delegated to
                          components and field activities. These activities are responsible for
                          determining which specific functions are suitable candidates for
                          competitions and whether there are sufficient positions to meet overall
                          competition goals. In addition, according to service officials, some or all of
                          the major commands were given numbers of positions to compete and
                          savings goals, and it is up to them to determine how best to meet the goals.

                          OSD on December 9, 1998, directed each component to develop multiyear
                          competition plans consistent with and presented at the same time as their
                          fiscal year 2001-2005 Program Objective Memorandum. OSD directed that
                          these plans should include, by fiscal year, the functions and numbers of
                          positions to be competed.



Perceived Efforts to      The Committee questioned whether Defense components may have
                          outsourced some activities, possibly even some involving inherently
Bypass Circular A-76      governmental functions, without following the procedures of OMB
and Related Legislation   Circular A-76 or meeting the 10 U.S.C. 2461 requirements for congressional
                          notification. Other than specific cases brought to our attention,
Difficult to Identify     procurement and commercial activities data systems do not identify the
                          extent to which Defense components may be outsourcing functions
                          without complying with these procedures or requirements.

                          Circular A-76 does not apply to inherently governmental activities. Defense
                          components are currently reviewing to what extent the functions



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              performed by DOD personnel are inherently governmental or otherwise
              exempted from A-76 competitive sourcing. DOD expects to report the
              results to the Congress early this year, but the results were not available for
              our review when we completed our work.

              We have been asked to review two reengineering cases, one in the Army
              and one in the Air Force, in which affected parties expressed the belief that
              Circular A-76 procedures and 10 U.S.C. 2461 requirements should have
              been followed. We are currently studying these cases and expect to report
              on them in the near future.



Conclusions   The costs and savings associated with Defense Reform Initiatives
              incorporated in DOD’s 1999-2003 FYDP include partial costs and savings
              from competitive sourcing and additional BRAC initiatives. While savings
              are expected from other initiatives, DOD has not required the services to
              calculate the specific savings to be obtained from them. Likewise, while
              personnel reductions are included in the FYDP and some are expected to
              result from DRIs, DOD has not required the components to link any
              personnel reductions with specific DRI elements. Also, questions exist
              about the precision of savings expected from BRAC and competitive
              sourcing. DOD assumed there would be additional base closures; however,
              the required legislative authorization has not been given. Further, the
              BRAC savings estimate, should future rounds occur, has limitations in
              terms of projecting short-term savings that might be realized. Competitive
              sourcing savings incorporated in the 1999-2003 FYDP were determined
              using broad estimates based on prior competitive sourcing experience, but
              they were not linked to specific positions and functions currently under
              study or planned for study at specific locations.

              There is no systematic way to identify whether components outsource
              functions without following the requirements of OMB Circular A-76 or the
              procedures of 10 U.S.C. 2461. Such cases can be identified only when they
              are specifically raised.

              We are currently reviewing two such allegations and expect to report on
              them individually in the near future.

              We recently recommended that the Secretary of Defense require Defense
              components to assess whether available resources are sufficient to execute
              the numbers of planned competitions within the envisioned time frames
              and make the adjustments needed to ensure adequate program execution.



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                      We also recommended that the Secretary require Defense components to
                      reexamine and adjust competitive sourcing study targets, milestones,
                      expected net short-term savings, and planned operating budget reductions
                      as necessary. Accordingly, we are not making additional recommendations
                      in this report.



Agency Comments and   We requested comments on a draft of this report from the Secretary of
                      Defense. On February 4, 1999, Department and service representatives
Our Evaluation        from their respective competitive sourcing offices provided us with the
                      following comments on the draft.

                      The representatives generally concurred with the information presented in
                      the report. DOD officials reiterated their previously stated position that
                      they have developed an aggressive competitive sourcing program by
                      planning to compete nearly 229,000 positions by fiscal year 2005. They
                      acknowledged that their program has met a number of challenges;
                      however, they believe none of these challenges are insurmountable. They
                      stated that through the program and budget review process, the
                      Department reviews the competitive sourcing study targets, milestones,
                      and objectives of the program to measure advancement toward its goals
                      and that adjustments are made to the program as necessary. Further, they
                      stated that several important improvement and oversight tools are being
                      worked into the competitive sourcing program during calendar year 1999
                      that will address our concerns. More specifically, according to these
                      officials, the DOD Competitive Sourcing Master Plan will, among other
                      things, identify by fiscal year the functions and number of component
                      positions to be competed by fiscal year 2005. Also, they stated each
                      component is undertaking a series of program improvement initiatives that
                      includes (1) identifying best practices, (2) assisting installation/activity
                      execution, (3) developing internal communications and training, and
                      (4) improving management information systems. DOD officials also stated
                      that the components have not completed enough studies, thus far, to
                      establish a baseline that would necessitate the reevaluation of their
                      milestones and objectives and that as more studies are conducted, they will
                      be able to better refine and adjust their study savings objectives.

                      While we support DOD’s efforts to institute more comprehensive oversight
                      tools and program improvement initiatives, we did not review any of these
                      efforts because they have not yet been fully implemented, and we are
                      therefore not in a position to comment on them. However, as we
                      previously reported, we continue to believe that DOD needs to reassess the



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              competitive sourcing study targets, milestones, expected short-term
              savings, and planned operating budget reductions now. The issues involve
              more than the number of competitions completed; they also involve the
              extent the planned announcements of competitions have been made and
              whether there are sufficient resources to complete them. This is of
              concern especially because of the large number of studies planned for
              announcement in fiscal years 1998 and 1999 and the delays encountered in
              getting the fiscal year 1998 studies under way. If similar delays are
              encountered in fiscal year 1999, they could seriously affect future program
              execution and DOD’s ability to achieve results in a timely manner.

              In addition, officials reiterated the Department’s disagreement with our
              statement that the precision of its future base closure costs was limited and
              that average net costs of future BRAC rounds will be higher than DOD
              estimated by using the cost experience of previous rounds. As we
              previously reported, our intent was to suggest that there are reasons to
              expect greater costs to close bases during any future implementation
              period than during the previous BRAC rounds because many bases with
              lower implementation costs and quicker offsets of closure costs have
              already been realigned or closed. Thus, the higher costs likely to be
              incurred in the future could reduce the net savings achieved during the
              implementation period. Nevertheless, we believe that future BRAC rounds
              can still result in significant savings.

              DOD also provided technical comments on our report, which we have
              incorporated as appropriate.



Scope and     To determine the savings included in the 1999-2003 FYDP that were the
              result of DRIs, we reviewed budget documents and discussed the issue
Methodology   with representatives from the DOD Comptroller’s office and the Army, the
              Navy, and the Air Force. We also drew on other work that we had
              underway or completed relating to competitive sourcing and the DRI.

              To determine the basis used to project competitive sourcing savings and
              personnel reductions in the 1999-2003 FYDP and whether they were based
              on studies of specific functions, we reviewed competitive sourcing budget
              submissions and the assumptions underlying the savings calculations. We
              also held discussions with service officials responsible for budget
              formulation and competitive sourcing program management. Further, we
              drew on work we had previously performed to evaluate DOD’s competitive




              Page 14                             GAO/NSIAD-99-66 Future Years Defense Program
B-281980




sourcing plans and programs, and to review the results of recently
completed competitions.

To determine whether Defense components outsourced inherently
governmental functions without allowing civilian employees to compete or
did not meet the requirements of 10 U.S.C. 2461, we reviewed pertinent
laws and other directives and discussed the issue with cognizant service
officials.

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


We are sending copies of this report to the Chairmen of the Senate
Committees on Armed Services and on Appropriations and the House
Committee on Appropriations; the Secretaries of Defense, the Army, the
Navy, and the Air Force; the Commandant of the Marine Corps; the
Director, Office of Management and Budget; and other interested
congressional committees. Copies will be made available to others upon
request.

Please contact me at (202) 512-8412 if you or your staff have any questions
concerning this report. Major contributors to this report are listed in
appendix II.




                                                        o




David R. Warren, Director
Defense Management Issues




Page 15                            GAO/NSIAD-99-66 Future Years Defense Program
Contents



Letter                                                                                             1


Appendix I                                                                                        18
The A-76 Process

Appendix II                                                                                       22
Major Contributors to
This Report

Tables                  Table 1: Programmed Savings and Positions to be Studied for
                          Competitive Sourcing, Fiscal Years 1997-2003                             7
                        Table 2: Comparison of Programmed Savings Rates Used by the
                          Services in the 1999-2003 FYDP                                          10



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




                        Abbreviations

                        BRAC          Base Realignment and Closure
                        DOD           Department of Defense
                        DRI           Defense Reform Initiative
                        FYDP          Future Years Defense Program
                        OMB           Office of Management and Budget
                        OSD           Office of the Secretary of Defense
                        QDR           Quadrennial Defense Review



                        Page 16                         GAO/NSIAD-99-66 Furture Years Defense Program
Page 17   GAO/NSIAD-99-66 Furture Years Defense Program
Appendix I

The A-76 Process                                                                              AppIexndi




              In general, the A-76 process consists of six 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 (MEO); (3) developing an in-house government cost
              estimate for the MEO; (4) issuing a Request for Proposals or Invitation for
              Bids; (5) evaluating the proposals or bids and comparing the in-house
              estimate with a private-sector offer or interservice support agreement and
              selecting the winner of the cost comparison; and (6) addressing any
              appeals submitted under the administrative appeals process, which is
              designed to ensure that all costs are fair, accurate, and calculated in the
              manner prescribed by the A-76 handbook.

              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 the commercial activity
              involves high levels of complexity, expertise, and risk.




              Page 18                             GAO/NSIAD-99-66 Future Years Defense Program
                                                      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-99-66 Future Years Defense Program
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 Request for Proposals, serves as the basis for both government
estimates and private sector offers. If the Invitation for Bids 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. Based on 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 along with the bids of all private sector firms.

According to the Office of Management and Budget’s (OMB) 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. This
minimum cost differential was established by OMB 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 cost estimate
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) higher performance levels, (2) lower
proposal risk, (3) better past performance, and (4) cost to do the work.
After the completion of this analysis, the selection authority prepares a
written justification supporting its decision. This 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 government must
then make changes 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 value private sector
offer. After determining that the offers are based on the same level of



Page 20                            GAO/NSIAD-99-66 Future Years Defense Program
Appendix I
The A-76 Process




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.

Participants in the process--for either the Invitation for Bids or Request for
Proposals process--may appeal the selection authority's decision if they
believe the costs submitted by one or more of the participants were not
fair, accurate, or calculated in the manner prescribed by the A-76
handbook.




Page 21                             GAO/NSIAD-99-66 Future Years Defense Program
Appendix II

Major Contributors to This Report                                                                     ApIpexndi




National Security and   Barry W. Holman, Associate Director
                        Marilyn K. Wasleski, Assistant Director
International Affairs   David B. Best, Senior Evaluator
Division, Washington,
D.C.

Chicago Field Office    Neal H. Gottlieb, Evaluator-in-Charge




(709379)                Page 22                            GAO/NSIAD-99-66 Future Years Defense Program
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