oversight

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs

Published by the Government Accountability Office on 1997-03-12.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Readiness, Committee on
                          National Security, House of Representatives




For Release on Delivery
Expected at
2:00 p.m., EDT
                          DEFENSE OUTSOURCING
Wednesday,
March 12, 1997

                          Challenges Facing DOD as
                          It Attempts to Save Billions
                          in Infrastructure Costs
                          Statement of David R. Warren, Director, Defense
                          Management Issues, National Security and International
                          Affairs Division




GAO/T-NSIAD-97-110
             Mr. Chairman and Members of the Committee

             I am pleased to be here today to present our observations, based on past
             and ongoing work, on the Department of Defense’s (DOD) goal to save
             billions of dollars by outsourcing work to the private sector and through
             other initiatives. For fiscal year 1997, DOD estimates that about $146 billion,
             or almost two thirds of its budget, will be for operations and support
             activities. These activities, which DOD generally refers to as its support
             infrastructure, include maintaining installation facilities, providing nonunit
             training to the force, providing health care to military personnel and their
             families, repairing equipment, and buying and managing spare parts
             inventories. As you requested, I will discuss DOD’s past experience in
             achieving infrastructure savings, key infrastructure areas that offer the
             greatest potential for savings, and challenges DOD faces in reaching goals
             to reduce infrastructure in the future.


             DOD  defines infrastructure as activities that generally operate from fixed
Background   locations to support missions like those carried out by combat forces.
             Infrastructure includes installation support; central training; central
             medical; central logistics; force management; acquisition; infrastructure;
             central personnel; and central command, control, and communications.
             DOD recognizes that its support structure is inefficient and that its costs
             continue to absorb a large share of the defense budget and diverts funding
             that could be used for modernization.

             DOD  has implemented various reform initiatives in the past to achieve
             efficiencies and reduce costs. The Defense Management Review (DMR),
             base realignment and closure (BRAC) process, National Performance
             Review, the bottom-up review, and other efforts proposed various actions
             intended to achieve these objectives. More recently, the Commission on
             Roles and Missions (CORM) and the Defense Science Board (DSB) have
             identified similar problems with DOD’s support structure and processes,
             but have made outsourcing and privatization the centerpiece of their
             reforms to reduce infrastructure and support costs. DOD defines
             outsourcing as the transfer of functions performed inhouse to outside
             providers and privatization as the transfer or sale of government assets to
             the private sector.

             Between fiscal year 1997 and 2002, DOD plans to increase procurement
             funding from $44.1 billion to $68.3 billion, primarily to buy new weapon
             systems and upgrade existing systems. DOD hopes that initiatives to reduce



             Page 1                                     GAO/T-NSIAD-97-110 Defense Contractor
                   infrastructure costs will provide much of the increased procurement
                   funding. Initiatives to achieve infrastructure and support savings include
                   outsourcing and privatization, acquisition reforms, organizational
                   streamlining and consolidation, management process reengineering, base
                   and facility closures, personnel reductions, and inventory reductions.
                   DOD’s quadrennial review is likely to identify additional plans and
                   initiatives for reducing infrastructure costs. If savings from these
                   initiatives are not achieved and the defense budget remains relatively
                   constant, planned weapon systems procurements may have to be delayed,
                   stretched out, or canceled; the force structure may have to be further
                   reduced; and/or compromises may have to be made in military readiness.


                   Before providing the details of my statement, I would like to briefly
Results in Brief   summarize the key points. First, we fully agree with DOD and others such
                   as the CORM and the DSB, that significant opportunities exist to reduce DOD’s
                   infrastructure and support costs. We also agree that many of the initiatives
                   that have been proposed relating to outsourcing represent real
                   opportunities for helping to achieve these savings. However, we question
                   whether the magnitude of savings anticipated by DOD and others is
                   attainable within the current strategy and force structure. To the extent
                   that these savings are not achieved, DOD and the Congress may have to
                   deal with difficult decisions about how to fund the needed modernization
                   of weapon systems and other DOD priorities.

                   Specifically, our past and ongoing work relative to DOD’s savings initiatives
                   shows that while past savings initiatives yielded significant savings, they
                   often fall short of DOD’s initial goal. For example, the DMR initiatives did not
                   achieve the level of savings that were originally estimated and many of the
                   initiatives proposed were not accomplished. For example, although
                   DOD-wide efforts to standardize and consolidate automatic data processing
                   systems under the Corporate Information Management initiatives
                   estimated savings of $2.18 billion during 1991 through 1995, these savings
                   were never realized and the program has largely been abandoned.
                   Likewise, most of the $5.6 billion savings projected for consolidation
                   initiatives have not materialized. Further, while DOD has substantially
                   reduced its infrastructure through the BRAC process and significant savings
                   will ultimately be achieved, savings will not be as great as initially
                   estimated or achieved as quickly as initially hoped. Also, efforts to
                   outsource various commercial activities under Office of Management and
                   Budget (OMB) Circular A-76, yielded some savings, but again the savings
                   were often less than anticipated. In the final analysis, today’s future years



                   Page 2                                      GAO/T-NSIAD-97-110 Defense Contractor
defense plan shows that, despite these initiatives, future infrastructure
costs will only slightly decline as a relative percentage of DOD’s budget.

Because of our concern about the waste and inefficiencies in DOD’s
support structure and operations, we have designated DOD’s infrastructure
as 1 of 24 high-risk areas that is vulnerable to waste and mismanagement
within the federal government. We believe that DOD could reap significant
savings by: (1) reducing excess capacity in its testing and evaluation areas
and reducing the 35-percent excess capacity in DOD’s laboratories and
centers; (2) reducing the 50-percent excess capacity within DOD’s depot
maintenance system; (3) reducing the costs of managing its $67 billion
inventory, of which almost half is beyond war reserve and operating
requirements, by aggressively adopting leading edge best practices;
(4) reducing installation support costs by relying more on interservice-type
arrangements and outsourcing more base support activities; and finally by
(5) reducing training costs by eliminating excess capacity within its
training facilities.

New ideas about reducing infrastructure costs have recently been
proposed to DOD that focus largely on outsourcing and privatization to
achieve savings. Our analysis of CORM, DSB, and OMB Circular A-76
proposals shows that, just as with past initiatives, there is reason for
caution about whether the magnitude of hoped for savings can be
achieved. Further, the CORM’s savings estimates are based primarily on
reported savings from public-private competitions under OMB Circular
A-76. However, as noted in our work and work done by others, the
projected savings from these competitions were not as high as expected.
Similarly, the DSB savings projections may be overly optimistic because
while they indicate that competition will result in reduced costs, a highly
competitive market does not exist in some of the areas being proposed.
Lastly, there are various legislative requirements that will also restrict and
otherwise affect DOD’s ability to implement some proposed initiatives. For
example, legislation prohibits the outsourcing of certain functions, such as
civilian firefighters or security guards at military installations. Also, there
are other provisions that affect the extent to which outsourcing can be
accomplished in other areas.

In conclusion, the opportunities for savings are great. However, from what
we have seen historically and from our analysis of current initiatives, it is
questionable whether the magnitude of hoped for savings will be achieved.
Notwithstanding this, we think DOD’s effort to reduce costs and achieve
savings is extremely important and we encourage DOD to move forward as



Page 3                                     GAO/T-NSIAD-97-110 Defense Contractor
                        quickly as possible. As we stated in our high-risk infrastructure report,
                        breaking down cultural resistance to change, overcoming service
                        parochialism, and setting forth a clear framework for a reduced defense
                        infrastructure are key to effectively implementing savings. To do this, the
                        Secretary of Defense and the service secretaries need to give greater
                        structure to their efforts by developing an overall strategic plan. The plan
                        needs to establish time frames and identify organizations and personnel
                        responsible for accomplishing fiscal and operational goals. DOD needs to
                        present this plan to the Congress in much the same way it presented its
                        plan for force structure reductions in the Base Force Plan and the
                        bottom-up review. This will provide a basis for the Congress to oversee
                        DOD’s plan for infrastructure reductions and will allow the affected parties
                        to see what is going to happen and when.


                        DOD  has initiated several efforts to improve the efficiency and reduce the
DOD Initiatives Have    costs of its support structure since 1990. While DOD has achieved some
Achieved Less Savings   success, it has not reaped the level of savings expected. Our prior work on
Than Projected          several of DOD’s major initiatives such as the DMR, the BRAC process, and
                        personnel downsizing illustrates this point and raises some issues the
                        Congress should be aware of as it reviews DOD’s current and anticipated
                        infrastructure and support cost reduction initiatives. Despite its initiatives
                        over the past 10 years, DOD’s infrastructure and support costs remain about
                        the same, in relative terms, as they were when these initiatives started. In
                        recent testimony before your Committee, one senior Air Force officer
                        noted:

                        “Our infrastructure was reduced by less than 21 percent after four BRAC rounds, while the
                        force structure fell by 40 percent. This disparity has introduced organizational
                        inefficiencies that drive up O&M costs, making it more difficult for us to give the taxpayers
                        best value for the dollars that we invest in national security . . . . Funding for military
                        construction and real property maintenance by contract has been cut to the bone, and
                        perhaps beyond. We are being pressed hard to find the resources to maintain our mission
                        essential facilities.”


                        Our work has shown that several factors have limited DOD’s success in
                        implementing prior initiatives and achieving the expected savings. DOD
                        officials have repeatedly recognized the importance of using resources for
                        the highest priority operational and investment needs rather than
                        maintaining unneeded property, facilities, and overhead. However, DOD has
                        found infrastructure reductions to be difficult and painful because they
                        require up-front investments, the closure of installations, and the




                        Page 4                                              GAO/T-NSIAD-97-110 Defense Contractor
                       elimination of military and civilian jobs. Service parochialism, a cultural
                       resistance to change, and congressional and public concern about the
                       economic effects on local communities, as well as the fairness of closure
                       decisions, have historically hindered DOD’s ability to close or realign bases.
                       DOD has also recognized that streamlining and reengineering its business
                       practices could result in savings, but it has made limited progress in doing
                       so. Many opportunities exist for consolidating and streamlining the
                       services support functions and activities. Unfortunately, DOD has
                       eliminated people and reduced funding without ensuring that the
                       initiatives have achieved the intended efficiencies. In some cases people
                       were reduced without redesigning the function or activity to reduce the
                       staffing needs. While DOD gained some efficiencies through this approach it
                       could have done better by thoroughly and thoughtfully analyzing what
                       work had to be done and where and by whom the work could most
                       cost-effectively be done.


DMR Savings Are Less   The 1989 DMR proposed a program of consolidations and management
Than Projected         improvements estimated to save tens of billions of dollars in support and
                       overhead programs and eliminate an estimated 42,900 civilian and military
                       positions over fiscal years 1991-95. The review resulted in 250 decisions to
                       implement consolidations, improve information systems, enhance
                       management, and employ better business practices. The projected savings
                       from each decision ranged from a few million dollars to over $10 billion.
                       Early in the program, DOD made several adjustments that included
                       reducing savings projections, extending the savings period for 2 years, and
                       identifying additional savings associated with new initiatives. As a result,
                       in April 1992, DOD projected DMR savings to be $71.1 billion for fiscal years
                       1991-97 (Air Force, $22.5 billion; Navy, $21.6 billion; Army, $20.9 billion;
                       and DOD agencies, $6.1 billion). In early 1993, DOD Comptroller officials
                       estimated that changes to the future years defense program (FYDP), force
                       reductions, and workload reductions could result in total savings of about
                       $62.8 billion rather than $71.1 billion. The savings reductions, however,
                       could not be tracked to specific DMR initiatives.

                       In reviewing initial savings estimates, we found that the estimates were
                       not always based on cost analyses supported by historical facts or
                       empirical cost data.1 During our 1993 review of the DMR we found it
                       difficult to validate and track savings to specific initiatives.2 Moreover, we

                       1
                         Acquisition Reform: Defense Management Report Savings Initiatives (GAO/NSIAD-91-11, Dec. 4,
                       1990).
                       2
                        Defense Management Review (NSIAD-94-17R, Oct. 7,1993).



                       Page 5                                                GAO/T-NSIAD-97-110 Defense Contractor
                        could not easily determine the extent to which savings resulted from the
                        initiatives or from other factors such as reduced workloads, changes in
                        force structure, or defense downsizing. For example, one initiative
                        claimed savings of $5.6 billion for the possible consolidation of supply
                        depots, inventory control points, maintenance depots, automatic data
                        processing design centers and operations, accounting operations and
                        finance centers, and research and development laboratories and test
                        facilities. However, most of these consolidations did not occur. Likewise,
                        an initiative to develop standard and consolidated automated data
                        processing systems throughout DOD was not accomplished. Finally, a DSB
                        task force known as the Odeen panel evaluated the DMR savings
                        projections and concluded there could be a $12.6-billion to $16.7-billion
                        shortfall between the DOD’s 1992 budget projections for fiscal years
                        1994-97. The panel also projected additional potential budget shortfalls of
                        $7.4 billion to $9.8 billion in fiscal years 1998 and 1999. Overall, it
                        projected an estimated shortfall for the 1994-99 FYDP could be between
                        $20 billion and $26.5 billion and that a shortfall existed in operation and
                        maintenance (O&M) funding. We reported in 1994 that the panel’s estimated
                        budget shortfall was generally low.3


BRAC Savings Are Less   Through the BRAC process initiated in 1988, DOD has closed or is closing
Than Projected          97 domestic bases. About 50 percent of the planned closures have been
                        completed. DOD reported that last year, for the first time, the savings from
                        closures exceeded the costs and savings from closures will continue to
                        accumulate each year.

                        DOD expected its base closures to reduce annual base support costs from
                        $41 billion in 1988 to $29.5 billion in 1997. Our analysis of base support
                        costs in the FYDP and at nine closing installations indicates that BRAC
                        savings should be substantial.4 However, the total amount of actual
                        savings is uncertain because DOD’s systems do not provide this
                        information. If DOD BRAC savings are less than estimated, DOD’s ability to
                        fund future programs at planned levels will be affected.

                        DOD has submitted annual BRAC cost and savings estimates, but their
                        usefulness is limited. For example, the Air Force’s savings were not based
                        on budget-quality data, and the Army’s estimates excluded reduced


                        3
                        DOD Budget: Evaluation of Defense Science Board Report on Funding Shortfalls (GAO/NSIAD-94-139,
                        Apr. 20, 1994).
                        4
                         Military Bases: Closure and Realignment Savings Are Significant, but Not Easily Quantified
                        (GAO/NSIAD-96-67, Apr. 8, 1996).



                        Page 6                                                  GAO/T-NSIAD-97-110 Defense Contractor
                           military personnel costs that the Navy and the Air Force included in their
                           estimates. Further, BRAC cost estimates excluded more than $781 million in
                           economic assistance to local communities as well as other costs.
                           Consequently, the Congress does not have a complete picture of projected
                           BRAC savings.



Outsourcing Using OMB      For the past three decades, federal agencies have been encouraged to
Circular A-76 Procedures   expand their procurements of goods and services from the private sector.
                           For years, DOD has been contracting out functions, activities, and services
                           it formerly accomplished using DOD civilian or military personnel. OMB
                           established procedures for determining whether commercial activities
                           should be outsourced in Circular A-76. These procedures, which have been
                           the primary vehicle used to make these outsourcing decisions, include a
                           handbook for performing cost-effectiveness evaluations. However, these
                           procedures and various provisions of legislation have, to some extent,
                           limited DOD outsourcing and resulting savings.

                           Using the A-76 process and procedures, DOD has conducted over 2,100
                           public-private competitions between 1978 and 1994.5 However, starting in
                           1988, the number of A-76 studies undertaken each year began to decline
                           substantially. Several legislative provisions limited DOD’s outsourcing
                           efforts. For example, the first provision, contained in the National Defense
                           Authorization Act for fiscal years 1988-89 (P.L. 100-180), gave authority to
                           installation commanders to determine whether to study activities for
                           potential outsourcing. Because of disruptions to their workforce, the cost
                           of conducting studies, and a desire for more direct control of their
                           workforce, various officials told us that commanders often chose not to
                           pursue outsourcing. This law, which was known as the “Nichols
                           Amendment” and codified at 10 U.S.C. 2468, was effective through
                           September 30, 1995. Another provision, contained in the DOD
                           Appropriations Act for Fiscal Year 1991 (P.L. 101-511) and subsequent DOD
                           appropriations acts, prohibited funding for lengthy A-76 studies. Finally, a
                           provision contained in the Department of Defense Authorization Acts for
                           Fiscal Years 1993 and 1994 prohibited DOD from entering into contracts
                           resulting from cost studies done under OMB Circular A-76. In response, DOD
                           imposed a moratorium on A-76 studies and canceled about three-quarters
                           of the ongoing studies. The prohibition expired on April 1, 1994, and DOD
                           subsequently lifted the moratorium. These provisions, along with the
                           Nichols Amendment, had the effect of limiting outsourcing in most of the

                           5
                            DOD maintains a database of those commercial activities that have undergone an A-76 study and the
                           projected savings that were estimated for each.



                           Page 7                                                GAO/T-NSIAD-97-110 Defense Contractor
                            services until 1996. In 1996, OMB revised its supplemental handbook in an
                            effort to streamline and improve the outsourcing process.

                            Fundamental to determining whether or not to outsource is the
                            identification of core functions and activities that DOD should continue to
                            do. OMB Circular A-76 characterizes core as those activities that are
                            “inherently governmental.” Under 10 U.S.C. 2464, the Secretary of Defense
                            is required to define DOD’s core functions, which are not to be contracted
                            out. DOD has proposed a risk assessment process to be used in identifying
                            core depot maintenance requirements and each of the services is in the
                            process of determining its core requirements using its own procedures.
                            DOD has not defined a core process or identified core requirements for
                            other logistics functions. It is not clear how the process will be used as
                            DOD increases outsourcing using OMB Circular A-76 and other procedures.


                            The A-76 competitions done through 1994 mostly involved low-skilled
                            work such as commissary operations, family housing and grounds
                            maintenance, administrative and custodial services, and food and guard
                            service. These activities generally involved low capital investment,
                            unskilled labor, and could be defined by relatively simple and
                            straight-forward requirements statements. The competitions generally
                            elicited vigorous competition. About 50 percent of the 2,100 competitions
                            were won by the public sector.

Concerns About Projected    For various reasons, we are concerned that projected savings of 20 to
Savings From A-76 Studies   40 percent reported from prior A-76 competitions are not reliable. For
                            example, our 1990 evaluation of DOD savings data showed that neither DOD
                            nor OMB had reliable data on which to assess the soundness of savings
                            estimates. Also, DOD and OMB did not know the extent to which expected
                            savings were realized because DOD did not routinely collect and analyze
                            cost information to track savings after a cost study had been done.6
                            Further, we have reported that (1) savings estimates represent projected,
                            rather than realized savings; (2) the costs of the competitions were not
                            included; (3) baseline cost estimates are lost over time; (4) actual savings
                            have not been tracked; (5) where audited, projected savings have not been
                            achieved; and (6) in some cases, work contracted out was more expensive
                            than estimated before privatization.7



                            6
                             OMB Circular A-76: DOD’s Reported Savings Figures Are Incomplete and Inaccurate
                            (GAO/GGD-90-58, Mar. 15, 1990).
                            7
                            Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are
                            Questionable (GAO/NSIAD-96-161, July 15, 1996).



                            Page 8                                               GAO/T-NSIAD-97-110 Defense Contractor
                           One commercial activity—depot maintenance—has in most cases been
                           exempted from the A-76 process by 10 U.S.C. 2469. However, DOD
                           implemented a similar program for depot maintenance activities beginning
                           in 1985, when the Congress authorized in the DOD Appropriations Act for
                           Fiscal Year 1985 (P.L. 98-473), a test program to allow public and private
                           shipyards to compete for the overhaul of selected ships on the basis of
                           cost comparisons. The program was later expanded to cover Naval
                           aviation, Air Force, and Army depot maintenance. In 1994, DOD terminated
                           its public-private competition program for depot maintenance. We
                           reported that the program had resulted in savings, although these savings
                           were difficult to quantify, and the program should be reinstated.8 The
                           statement of managers in the conference report on the DOD Appropriations
                           Act for Fiscal Year 1995 provided for the reinstitution of the program,
                           which was accomplished in 1996.9


Large Personnel            Since about 40 percent of the O&M budget funds civilian salaries, DOD
Reductions Have Not        expects that initiatives to reduce civilian personnel will result in
Resulted in Commensurate   substantial O&M budget reductions. Between 1990 and 1997, DOD has
                           reduced its civilian workforce by 275,000 people—or about 26 percent.
Operations and             Over the same period, the number of active duty service members were
Maintenance Budget         reduced by 29 percent and defense-related private sector employees were
Reductions                 reduced by 34 percent. Table 1 shows personnel reductions for selected
                           civilian occupational categories. Secretaries and depot maintenance
                           personnel took the largest percentage reduction, at 52 percent and
                           48 percent, respectively, while educators were reduced by only 5 percent
                           and scientists by 6 percent. Fire and police personnel were reduced by
                           17 percent and installation maintenance by 20 percent.




                           8
                            Navy Maintenance: Assessment of the Public-Private Competition Program for Depot Maintenance
                           (GAO/NSIAD-96-30, Jan. 22, 1996); Depot Maintenance: Opportunities to Privatize Repair of Military
                           Engines (GAO/NSIAD-96-33, Mar. 5, 1996); and Closing Maintenance Depots: Savings, Workload, and
                           Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996).
                           9
                            H.R. CONF. REP. NO. 103-747.



                           Page 9                                                 GAO/T-NSIAD-97-110 Defense Contractor
Table 1: Changes in Personnel Strengths for DOD and Defense-Related Private Sector Employees
Numbers in thousands
                                                                                                                              Reductions in
Personnel                                           FY 1990                    FY 1997                  Reduction                  percent
Active duty military                                   2,143                       1,521                        622                        29
DOD civilian                                           1,073                         798                        275                        26
Total                                                  3,216                       2,319                        897                        28
Defense-related private sector                         3,150                       2,080                      1,070                        34
employees
Selected occupational categories of DOD civilians
DOD depot maintenance employees                           147                         76                         71                        48
Scientists                                                 16                         15                           1                        6
Data systems managers                                      37                         25                         12                        32
Installation maintenance                                   10                           8                          2                       20
Legal                                                       3                           3                          0                        0
Medical technicians                                        10                           9                          1                       10
Personnel services                                         19                         15                           4                       21
Secretarial                                                69                         33                         36                        52
Fire and police                                            18                         15                           3                       17
Educators                                                  20                         19                           1                        5

                                          During our review of outsourcing base support operations, various
                                          installation commanders told us that one way of achieving
                                          across-the-board personnel reductions mandated by the Office of the
                                          Secretary of Defense is to outsource, which would free remaining civilian
                                          authorizations for use in other activities. One senior command official in
                                          the Army stated that the need to reduce civilian positions is greater than
                                          the need to save money. This view was reinforced by the DOD Inspector
                                          General’s 1995 report on cost growth, which noted that “the goal of
                                          downsizing the Federal workforce is widely perceived as placing DOD in a
                                          position of having to contract for services regardless of what is more
                                          desirable and cost effective.”

                                          Despite a reduction of 275,000 civilian personnel since 1990, and plans for
                                          further substantial reduction over the next several years, our analysis of
                                          the 1997-2001 FYDP shows that infrastructure costs are expected to
                                          increase. In May 1996, we reported that the infrastructure portion of the
                                          1997 FYDP is projected to increase about $9 billion, from $146 billion in
                                          1997 to $155 billion in 2001 (see table 2).10 Despite this increase, the

                                          10
                                           Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization
                                          (GAO/NSIAD-96-131, Apr. 4, 1996).



                                          Page 10                                                GAO/T-NSIAD-97-110 Defense Contractor
                                   infrastructure costs as a proportion of the total budget, is projected to
                                   decrease slightly from about 60 percent in 1997 to about 57 percent in
                                   2001. The decrease results primarily because DOD’s total budget is
                                   projected to increase at a faster rate than the infrastructure part of the
                                   budget.11

Table 2: DOD’s Projected Funding
Through Fiscal Year 2001           Dollars in billions
                                                                                                                    Percentage of
                                                                  Total projected      Infrastructure part          budget that is
                                   Fiscal year                            budget                of budget           infrastructure
                                   1997                                       $244                     $146                        60
                                   1998                                         249                     145                        58
                                   1999                                         255                     148                        58
                                   2000                                         263                     150                        57
                                   2001                                         270                     155                        57
                                   Source: GAO analysis of DOD’s 1997-2001 FYDP.



                                   The installation support portion of DOD’s infrastructure budget is projected
                                   to decline during the 1997 to 2001 period, in part, due to savings generated
                                   from the BRAC process. However, other infrastructure categories, including
                                   acquisition infrastructure; force management; central logistics; central
                                   medical; central training; central personnel; and central command, control,
                                   and communications are projected to increase, although individual
                                   accounts within these areas, such as military construction and real
                                   property maintenance, are declining. The combination of O&M and military
                                   personnel appropriations fund about 80 percent of infrastructure activities
                                   that can be clearly identified in the FYDP. Thus, DOD must look to these
                                   appropriations if it intends to spend less for infrastructure activities.




                                   11
                                    Defense Infrastructure: Costs Projected to Increase Between 1997 and 2001 (GAO/NSIAD-96-174,
                                   May 31, 1996).



                                   Page 11                                              GAO/T-NSIAD-97-110 Defense Contractor
Shortfalls in Operation and              Planned reductions in DOD’s O&M costs have not achieved expected
Support Cost Reductions                  decreases in the O&M budget. For example, as illustrated in figure 1,
Limit Planned                            although the fiscal year 1995 FYDP projected that O&M funding would be
                                         about $88 billion in fiscal year 1997, the 1997 FYDP estimated that O&M
Procurement Fund                         expenditures for fiscal year 1997 would be $1.2 billion more than projected
Increases                                2 years earlier. Moreover, the most recent 1998 FYDP estimate shows that
                                         about $92.9 billion will be required to support operations funded by the
                                         O&M account during 1997—$5 billion more than projected by the 1995 FYDP.




Figure 1: Operation and Maintenance Spending Estimates for Fiscal Years 1997-99
Dollars in billions
Dollars in billions
   Thousands


94


92


90


88


86

             FY 1997                  FY 1998                   FY 1999
                                     Fiscal Year
                   FYDP 95       FYDP 96      FYDP 97      FYDP 98


                                         Conversely, as shown in figure 2, the procurement account had to be
                                         reduced over that same period to offset increases in O&M cost. Thus,
                                         planned DOD increases in procurement funding had to be put aside because
                                         of the realities of funding day-to-day operational support costs. For
                                         example, the 1995 FYDP projected that DOD would spend $49.8 billion for
                                         procurement in fiscal year 1997. However, DOD actually budgeted only



                                         Page 12                                  GAO/T-NSIAD-97-110 Defense Contractor
                                         $38.9 billion for procurement—over $10 billion less than projected 2 years
                                         earlier. Although the 1998 FYDP indicates that an additional $5.2 billion was
                                         spent for Procurement during 1997 than was budgeted the previous year,
                                         the $44.1 billion expenditure was still $5.7 less than had been projected in
                                         1995 to be spent for procurement in 1997.



Figure 2: Procurement Spending Estimates for Fiscal Years 1997-99

Dollars in billions
65


60


55


50


45


40


35
             FY 1997                   FY 1998                         FY 1999
                                     Fiscal Year
              1995 FYDP       1996 FYDP          1997 FYDP            1998 FYDP


                                         As we recently reported, despite DOD’s initiatives, it is critical for DOD to
Opportunities for                        further reduce infrastructure and support costs.12 After 10 years of effort,
Achieving Future                         billions of dollars are still being wasted annually on inefficient and
Infrastructure Savings                   unneeded activities. For fiscal year 1997, DOD estimates that about
                                         $146 billion, or almost two-thirds of its budget, will be for operation and
                                         support activities. These activities, which DOD generally refers to as


                                         12
                                           High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).



                                         Page 13                                                 GAO/T-NSIAD-97-110 Defense Contractor
    support infrastructure, include research, development, and procurement
    of major weapon systems; buying and managing spare parts and repairing
    equipment; maintaining installation facilities; providing non-unit training
    to the force; and providing health care to military personnel and their
    families. Significant excess capacity exists in these activities. While there
    are many opportunities to reduce this excess capacity and improve the
    cost-effectiveness of DOD support operations, DOD faces many challenges in
    doing so. I will briefly highlight some of the key areas where costly excess
    capacity and infrastructure remain and have the greatest potential for
    savings—particularly through reengineering and consolidating functions
    and activities among the services.

•   Acquisition infrastructure, which includes activities and personnel that
    support the research, production, and procurement of weapon systems
    and other critical defense items, accounts for about $10.2 billion. We have
    noted problems in achieving consolidations in testing and evaluation areas
    and stated that DOD should consider consolidations in two areas—Air
    Force and Navy electronic warfare threat testing capabilities and high
    performance fixed-wing aircraft testing capabilities. No major
    consolidations or reductions have occurred. Likewise, although DOD’s
    laboratories and logistics centers have excess capacity of about
    35 percent, prior reform initiatives have generally focused on management
    efficiencies rather than infrastructure reductions.
•   Central logistics, which includes maintenance activities, the management
    of materials, operation of supply systems, communications, and minor
    construction, accounts for as much as $51 billion, including funding from
    the military revolving funds. We have identified long-standing problems
    and opportunities to reduce infrastructure costs in the key area of
    inventory management. While the Defense Logistics Agency has taken
    steps to reengineer its logistics practices and reduce consumable
    inventories, it could do more to achieve substantial savings. Further,
    although DOD has made progress in reducing the value of its secondary
    inventory, in part by adopting leading edge practices, including use of
    prime vendor delivery, our analysis of inventory valued at $67 billion
    showed that $41.2 billion of the inventory was not needed. About
    $14.6 billion of the unneeded inventory did not have projected demands
    and will likely not ever be used.13 Additionally, DOD is currently reassessing
    the issue of streamlining and consolidating the management of the
    inventory control points, which are responsible for material management.
    We have also reported that BRAC recommendations for depot maintenance
    closures during the 1995 round did little to eliminate excess capacity and

    13
      Defense Logistics: Much of the Inventory Exceeds Current Needs (GAO/NSIAD-97-71, Feb. 28, 1997).



    Page 14                                               GAO/T-NSIAD-97-110 Defense Contractor
    that excess capacity in the depot system remains at about 50 percent, with
    the Air Force and the Army having the greatest problems in this area.
•   Installation support, which includes personnel and activities that fund,
    equip, and maintain facilities from which defense forces operate, will
    consume about $30 billion, or about 17 percent of the projected fiscal year
    1997 infrastructure expenditures. The central issue is that after four BRAC
    rounds, the services have reduced their facilities infrastructure at a much
    smaller rate than their force structure. Despite the recognized potential to
    reduce base operating support costs through greater reliance on
    interservice-type arrangements, the services have not taken sufficient
    advantage of available opportunities. Differing service traditions and
    cultures and concern over losing direct control of support assets have
    often caused commanders to resist interservicing. Additionally, by having
    too much infrastructure to support, available military construction and
    repair dollars are thinly spread.
•   Central training infrastructure, which includes basic training for new
    personnel, aviation and flight training, military academies, officer training
    corps, other college commissioning programs, and officer and enlisted
    training schools, will account for about $19 billion, or 13 percent of
    projected 1997 infrastructure expenditures. We have identified several
    training-related installations with relatively low military value that were
    not proposed for closure, despite the long-term savings potential. We have
    also pointed out interservicing opportunities that remain.
•   Central medical, which includes personnel and funding for medical care
    provided to military personnel, dependents, and retirees, will account for
    about $16 billion of the projected 1997 infrastructure expenditures.
    Activities include medical training, management of the military health care
    system, and support of medical installations. Each of the military
    departments operates its own health care system, even though these
    systems have many of the same administrative, management, and
    operational functions. Since 1949, over 22 studies have reviewed the
    feasibility of creating a health care entity within DOD to centralize
    management and administration of the three systems—most of them
    encouraging some form of organizational consolidation.




    Page 15                                   GAO/T-NSIAD-97-110 Defense Contractor
                             Over the last several years, DOD has renewed its efforts to achieve
Challenges DOD               infrastructure savings through the use of the A-76 process. At the same
Faces as It                  time, studies provided by the CORM and DSB over the last 2 years have
Implements and               provided increasingly aggressive outsourcing proposals and predictions of
                             significant savings. Key elements of the DOD effort and the two studies are:
Considers Proposals
to Achieve               •   DOD  anticipates that by 2003 it can achieve over $2 billion savings annually
                             from outsourcing activities that involve about 130,000 civilian personnel.
Infrastructure Savings       Further, DOD has reportedly programmed the savings into its fiscal year
                             1998 FYDP.
                         •   The CORM report issued in May 1995 recommended that DOD outsource or
                             privatize all current and newly established commercial-type support
                             services. The report estimated that taking this action could save over
                             $3 billion a year.
                         •   The DSB report issued in November 1996 recommended dramatic
                             restructuring of DOD’s support structure by maximizing the use of the
                             private sector for almost all support functions. From this and other
                             proposed changes such as the use of better business practices, the DSB
                             estimated over $30 billion dollars could be saved annually from defense
                             infrastructure accounts by the year 2002.

                             We agree that substantial savings can be achieved by outsourcing and
                             privatizing; consolidating similar functions to reduce excess capacity;
                             reengineering remaining functions, processes, and organizations; more
                             effectively using technology innovations; and through other initiatives.14
                             Our recent report on downsizing the defense infrastructure provides
                             13 options that could result in savings of about $11.8 billion from fiscal
                             years 1997 to 2001. However, based on the lessons learned from past
                             initiatives and principally our work on depot maintenance and base
                             support operations, we are concerned that savings of the magnitude
                             projected by DOD, the CORM, and the DSB may not be achievable. Last, as
                             noted by DOD, the CORM, and DSB, a number of legislative requirements
                             restrict or affect implementation of these proposals. The extent to which
                             these requirements change or remain the same will also affect savings
                             estimates.




                             14
                              Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization
                             (GAO/NSIAD-96-131, Apr.4, 1996).



                             Page 16                                                GAO/T-NSIAD-97-110 Defense Contractor
Outsourcing Savings           In 1993, the National Performance Review endorsed outsourcing, noting
Expectations May Not Be       that DOD should implement a comprehensive program for outsourcing
Achievable in the             non-core functions. According to its report, Creating a Government That
                              Works Better & Costs Less, DOD had identified 50 broad area candidates
Magnitude Projected           for outsourcing, such as base operations support, housing, health services,
                              maintenance and repair, training, labs, security, and transportation. The
                              report noted that outsourcing should take place when it makes economic
                              and operational sense, based on accomplishing the following steps:

                          •   clearly describe the function in objective terms of what gets done and how
                              its gets done, but not who does it;
                          •   categorize the function as either core or non-core;
                          •   establish detailed, specific performance requirements for each function
                              based on the commander/manager’s mission and customer requirements;
                          •   analyze legal, supplier, and performance requirements for each function to
                              determine the source that best balances economic benefits with
                              operational risks;
                          •   produce a detailed performance agreement and associated documents for
                              the function (e.g., performance work statement and request for proposals
                              if the function is to be outsourced); and
                          •   introduce cost competition.

                              We recently reported that DOD is significantly increasing its emphasis on
                              outsourcing base operation support and other activities through the A-76
                              process.15 Our work shows that while opportunities for savings exist, it is
                              questionable whether they will be in the magnitude currently being
                              projected. From October 1995 to January 1997, the services announced
                              plans to begin studies during fiscal years 1996 and 1997 that involve over
                              34,000 positions, most of which were associated with base support
                              activities. Further studies involving an additional 100,000 positions will be
                              started over the next 6 years. We recognized that outsourcing is
                              cost-effective because the competitions generate savings—usually through
                              a reduction in personnel—whether the competition is won by the
                              government or the private sector. However, we questioned some of the
                              services’ savings projections.

                              After a somewhat slow start in beginning to do A-76 cost studies after
                              reinstitution of the program within DOD, the services are now expanding
                              the A-76 program. One of the reasons is that the services had lost much of
                              the expertise required to define the requirements and conduct the cost

                              15
                               Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing
                              (GAO/NSIAD-97-86, Mar. 11, 1997).



                              Page 17                                             GAO/T-NSIAD-97-110 Defense Contractor
                           evaluations during recent personnel downsizing. The Air Force, which has
                           led the way in initiating new studies, plans to study up to 60,000 positions
                           for potential outsourcing from 1998 through 2003—the majority of which
                           are in base support services. The Army plans to study about 11,000 mostly
                           civilian positions in fiscal year 1997 and another 5,000 from fiscal year
                           1998 to 2003. The Navy plans to begin studies of about 80,000 positions for
                           potential outsourcing over the next several years—about 50,000 civilians
                           and 30,000 military. Although the Marine Corps estimates it will study
                           about 5,000 positions, it does not have a firm timetable for initiating or
                           completing these studies.

                           The Air Force projects a 20-percent cost savings of up to $1.26 billion
                           initially from outsourcing mostly base support functions between 1998 and
                           2003. The Army projected a 10-percent savings but recently increased its
                           savings projection to 20 percent. The Marine Corps projects initial savings
                           of about $10 million per year beginning in 1998, increasing to $110 million
                           per year by fiscal year 2004. The Navy projects a 30-percent net cost
                           savings.

                           As previously discussed, we have concerns about whether the 20- to
                           30-percent savings assumed by the services will be achieved. The savings
                           projections are based on unverified projections rather than on actual A-76
                           savings, and where audited, the estimated savings did not achieve the
                           projections, even though the costs of the competitions were not taken into
                           consideration. Additionally, we recently found that many installation
                           officials expressed concern that personnel downsizing had already
                           eliminated much of the potential for outsourcing to achieve additional
                           personnel savings. Also, potential outsourcing savings may be minimized
                           by increases in the scope of work done under outsourcing. Such increases
                           can occur, when funding becomes available to restore a level of service
                           that had been previously reduced due to resource constraints, such as
                           maintenance and repair activities.


Savings in the Magnitude   In its report, Directions for Defense (May 24,1995), the CORM
Projected by the CORM      recommended that DOD outsource all current and newly established
Are Questionable           commercial-type support services. According to the report, outsourcing
                           candidates should range from routine commercial support services widely
                           available in the private sector to highly specialized support of military
                           weapons. For example, janitorial companies might perform facilities
                           maintenance, replacing government custodians; and commercial software
                           engineering firms might upgrade computer programs for sophisticated



                           Page 18                                   GAO/T-NSIAD-97-110 Defense Contractor
                     aircraft electronic countermeasures equipment, replacing government
                     software specialists. CORM’s report recommended the following actions:

                 •   Outsource new support requirements, particularly the depot-level logistics
                     support of new and future weapon systems.
                 •   OMB withdraw Circular A-76; the Congress repeal or amend legislative
                     restrictions; and DOD extend to all commercial-type activities a policy of
                     avoiding public-private competition where adequate private sector
                     competition exists.
                 •   Move to a time-phased plan to privatize essentially all existing depot-level
                     maintenance.
                 •   Outsource selected material management activities.
                 •   Increase access to and require enrollment in private sector medical care
                     and require users of DOD care to enroll and DOD to set a fee structure and
                     institute a medical allowance for active duty service members’ families.
                 •   Outsource family housing, finance and accounting, data center operations,
                     education and training, and base infrastructure.

                     The report stated that its recommendations for greater use of private
                     market competition would lower DOD’s support costs and improve
                     performance—noting that a 20-percent savings from outsourcing DOD’s
                     commercial-type workload would free over $3 billion per year for higher
                     defense needs.

DOD’s Response       In response to the CORM report, in 1995 the Deputy Secretary of Defense
                     established integrated policy teams to explore outsourcing opportunities
                     for base support, depot maintenance, material management, education and
                     training, finance and accounting, data processing, and family housing. The
                     teams were expected to identify potential outsourcing candidates, analyze
                     obstacles to outsourcing, and develop solutions to facilitate
                     implementation. In addition, the Secretary established cross-functional
                     teams to recommend changes to OMB Circular A-76 and various legislative
                     provisions that could otherwise delay or impede implementation of newly
                     identified outsourcing initiatives.

                     The material management team developed business case analyses for
                     outsourcing parts of the Defense Reutilization and Marketing Service and
                     Defense Logistics Agency storage and warehousing operations. The team
                     also identified the Defense Logistics Agency and military inventory control
                     point cataloging function for possible outsourcing. The finance and
                     accounting team identified several potential outsourcing candidates,
                     including claims management, defense commissary bill paying,



                     Page 19                                   GAO/T-NSIAD-97-110 Defense Contractor
                              nonappropriated fund accounting, and payroll. One of the cross-functional
                              teams developed a proposed legislative package that called for the
                              Congress to rescind all legislative and administrative provisions
                              constraining outsourcing. This proposal was not adopted. While some
                              outsourcing team meetings are still being held, this effort could be
                              consumed by DOD’s current quadrennial defense review, which is likely to
                              identify outsourcing as one of its key initiatives.

Savings Projections Are Not   While recognizing the potential savings from outsourcing, we question the
Well Supported                savings projections cited by the CORM. As we reported in July 1996, the
                              CORM’s data did not support its depot privatization savings assumption.16
                              Half of the competitions were won by the public sector. Further,
                              assumptions were based primarily on reported savings from public-private
                              competitions for commercial activities under OMB Circular A-76. Many
                              private sector firms generally made offers for this work due to the highly
                              competitive nature of the private sector market for these activities, and
                              estimated savings were generally greater if there were a large number of
                              competitors. We also noted that our work and defense audit agencies have
                              reported that projected savings were often not achieved or were less than
                              expected due to cost growth and other factors. Further, the savings
                              resulted from competition rather than from privatization.

                              Finally, we also noted that outsourcing in the absence of a highly
                              competitive market, would not likely achieve expected savings and could
                              increase the cost of depot maintenance operations. Further, our data
                              shows that outsourcing risks are higher when privatizing unique, highly
                              diverse, and complex work where requirements are difficult to define,
                              large capital investments are required, extensive technical data is involved,
                              and highly skilled and trained personnel are required. CORM assumed that
                              meaningful competition would be generated for most of the work it
                              recommended be privatized. Yet, for depot maintenance, 76 percent of the
                              240 depot maintenance contracts we reviewed were awarded on a
                              sole-source basis.


DSB Projected $30 Billion     The final report of the DSB in November 1996, Achieving an Innovative
Savings Are Questionable      Support Structure for 21st Century Military Superiority, recommended a
                              dramatic restructuring of DOD’s support structure by maximizing the use of
                              the private sector for almost all support functions. The DSB provided a new
                              vision where DOD would only provide warfighting, direct battlefield

                              16
                               Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are
                              Questionable (GAO/NSIAD-96-161, July 15, 1996).



                              Page 20                                             GAO/T-NSIAD-97-110 Defense Contractor
                                  support, policy and decision-making, and oversight. All other activities
                                  would be done by the private sector—using best practices for achieving
                                  better, faster, lower-cost results. The following are examples of changes
                                  that might result from DSB’s new vision:

                              •   Use the private sector for logistics and maintenance in the continental
                                  United States. DOD would get out of the repair and inventory management
                                  business. Expand contractor logistics support—the life-cycle support of
                                  weapon systems often by the original equipment manufacturers. The
                                  report noted that relief from legislative constraints would be required, but
                                  that most contractor logistic support could be done without legislative
                                  changes. DOD would make an investment of $300 million to $500 million for
                                  reliability improvements.
                              •   Privatize-in-place testing and evaluation facilities.
                              •   Outsource automatic data processing business to four to six
                                  contractor-owned facilities.
                              •   Outsource most DOD finance and accounting service functions.
                              •   Use the private sector to manage DOD housing. Raise allowances and use
                                  contractors to build and manage housing where no markets exist.
                              •   Privatize DOD commissaries.
                              •   Privatize all remaining special skills training.
                              •   Privatize all remaining base operating support functions.

                                  DSB’s  report also advocated revoking OMB Circular A-76. In the meantime,
                                  the report suggested avoiding it by recategorizing and getting out of the
                                  business of performing various functions, an approach the report noted
                                  the Defense Logistics Agency had successfully employed when it
                                  transferred the pharmaceutical warehousing and distribution functions to
                                  vendors. According to the report, if DOD implemented the specific
                                  recommendations of DSB, over $30 billion could be reduced annually from
                                  defense infrastructure accounts by the year 2002. The report used a
                                  baseline of $140 billion for current annual DOD infrastructure costs. These
                                  savings were dependent on a reduction of about 5 percent per year in the
                                  civilian workforce and about 2 percent per year of military personnel over
                                  the next 5 years. The report also recommended a series of base
                                  realignment and closure reviews.

DSB Savings Assumptions Are       We have not yet completed our analysis of the DSB report. In general, we
Questionable                      agree that there are great opportunities for savings in many of the areas
                                  they address. Also, we share their concern that too much excess capacity
                                  remains in many of DOD’s infrastructure activities. We also believe that
                                  outsourcing and the use of leading edge business practices, such as direct



                                  Page 21                                  GAO/T-NSIAD-97-110 Defense Contractor
    vendor delivery for inventory, represent opportunities to reduce costs.
    However, the outsourcing savings projected by this study were based on
    essentially the same assumptions as those used by the CORM, although the
    DSB study expanded the functions and activities that it recommended for
    outsourcing and claimed savings of up to 40 percent from privatization.
    Our analysis indicates that savings projections of $30 billion are not likely
    to be achieved. These savings assumptions were not supported and were
    based on favorable conditions that may not currently exist for a number of
    activities recommended for outsourcing. We have found that outsourcing
    savings are dependent on or highly influenced by (1) the continual
    existence of a competitive commercial market; (2) the ability to clearly
    define the tasks to be done and measure performance; (3) the assumption
    that the private sector can do the required work more cost-effectively than
    a reengineered DOD activity; (4) the extent that commercial contracting
    and contract management practices can be applied to the outsourced
    activity; (5) the relative cost-effectiveness of the public activity being
    outsourced; and (6) the ability to reduce the existing public infrastructure
    and personnel costs associated with the outsourced activity. Further, the
    DSB savings projections may also include functions and activities that are
    determined to be core.

    Another area of concern is that the DSB referred often to outsourcing
    competitively, yet it recommended total contractor logistics support for
    weapon systems—often a sole-source arrangement with the original
    equipment manufacturer—which could include maintenance, supply,
    systems management, and other functions for the life of the systems. We
    question whether this is the appropriate model for most weapon systems
    and are concerned about its potential for cost growth and long-term
    impact on core capabilities for several reasons:

•   First, while DOD managers have found contractor logistics support to be
    cost-effective for commercially derived systems with established
    competitive repair sources—these conditions are not present for military
    unique systems and cutting edge technologies.
•   Second, our past work demonstrates that most depot work is sole-sourced
    to the original equipment manufacturer, raising cost and future
    competition concerns. DOD managers told us that steadily escalating prices
    are typical of sole-source contractor logistics support contracts.
•   Third, privatizing total support on new and future weapon systems can
    make it difficult for the organic depots to acquire and sustain technical
    competence on new systems, leading edge technologies, and critical repair
    processes necessary to maintain future core capabilities, provide a



    Page 22                                   GAO/T-NSIAD-97-110 Defense Contractor
                            credible competitive repair source, and be a smart buyer for those logistics
                            activities that will be contracted out.

                            When competition—whether from the private sector or an organic
                            depot—is introduced, prices decline. For example, the Air Force identified
                            $350 million in savings when it was able to recompete contractor logistics
                            support contracts and move the maintenance work from the manufacturer
                            to other commercial firms, including $50 million in savings on the KC-10
                            by awarding a competitive contract to the firm previously subcontracted
                            to the prime, thus cutting out the “middle-man”. The Air Force is also
                            achieving significant savings as a result of interservicing the F404 engine
                            to a Navy depot rather than continuing to contract on a sole-source basis
                            with the original equipment manufacturer as the Air Force did for many
                            years.

                            Finally, while the DSB report seems to assume that outsourcing is the most
                            cost-effective option for all DOD support operations, this may not be the
                            case. The reengineered public entity was determined to be the most
                            cost-effective for the over 2,100 competitions conducted using A-76
                            procedures. Further, our review of public-private depot maintenance
                            competitions indicated that the private sector frequently offered the best
                            value.


Effects of Legislation on   A number of legislation provisions may limit outsourcing. For example,
Outsourcing                 section 2464 of title 10 provides that DOD activities should maintain a
                            logistics capability (personnel, equipment, and facilities) sufficient to
                            ensure technical competence and resources necessary for an effective and
                            timely response to a mobilization or other national defense emergency. It
                            also requires the Secretary of Defense to define logistics activities that are
                            necessary to maintain the logistics capability. Those activities may not be
                            contracted out without a waiver by the Secretary. DOD has proposed a risk
                            assessment process to be used in identifying core depot maintenance
                            requirements and each of the services is in the process of determining its
                            core requirements using the procedures each has implemented to do so.
                            DOD has not defined a core process or identified core requirements for
                            other logistics functions. It is not clear how that process will be conducted
                            as DOD increases outsourcing using OMB Circular A-76 and other
                            procedures. Other statutes affecting the privatization of depot




                            Page 23                                   GAO/T-NSIAD-97-110 Defense Contractor
              maintenance are discussed in our March 1996 report addressing
              opportunities for privatizing repair of military engines.17

              Also, 10 U.S.C. 2461 requires A-76 cost comparisons, congressional
              notification of studies involving more than 45 civilians, and annual reports
              to the Congress on outsourcing. Section 2465 of title 10 prohibits DOD from
              outsourcing civilian firefighters or security guards at military installations.
              DOD’s fiscal year 1996 inventory of civilian and military personnel
              performing commercial activities shows that about 9,600 firefighters and
              16,000 security guards are exempt from outsourcing because of this law
              and other considerations, such as mobility requirements. Outsourcing is
              permitted only if the positions were outsourced before September 24,
              1983. We plan to assess this issue more thoroughly by comparing the cost
              of in-house positions in selected instances where such services have been
              outsourced.


              In conclusion, we agree with DOD that its infrastructure costs can and
Conclusions   should be substantially reduced, and we believe that DOD should identify
              key functions and activities where it should focus to identify
              requirements—including core—and begin to reengineer those activities
              and functional areas that appear to offer the best opportunities for savings.
              Outsourcing, when used correctly, has been an effective tool in achieving
              cost reductions. Our work advocates expanded reliance on the private
              sector where that is the most cost-effective solution. However, evaluations
              must be made on an individual basis, taking into consideration the costs
              and benefits of each potential outsourcing opportunity.

              DOD  already has programs to identify potential infrastructure reductions in
              many areas. However, breaking down cultural resistance to change,
              overcoming service parochialism, making decisions to eliminate cross
              functional stovepipes, and setting forth a clear framework for a reduced
              defense infrastructure are key to avoiding waste and inefficiency and
              generating the maximum savings from DOD’s infrastructure accounts. To
              do this, the Secretary of Defense and the service secretaries need to give
              greater structure to their efforts by developing an overall strategic plan
              that establishes time frames and identifies organizations and personnel
              responsible for accomplishing fiscal and operational goals. DOD needs to
              present this plan to the Congress in much the same way that it presented
              its plans for force structure reductions in the Base Force Plan and


              17
                 Depot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO/NSIAD-96-33,
              Mar. 5,1996).



              Page 24                                                GAO/T-NSIAD-97-110 Defense Contractor
           bottom-up review. The Congress can then oversee the plan and allow the
           affected parties to see what is going to happen, and when. In developing
           the plan, DOD should consider using a variety of means to achieve
           reductions, including consolidations, reengineering, interservicing
           agreements, and outsourcing—with appropriate personnel reductions
           implemented to take advantage of the efficiencies generated by these
           initiatives. It should also consider the need and timing for future BRAC
           rounds, as suggested by the 1995 BRAC Commission and other groups.


           Mr. Chairman, this concludes my prepared remarks. I would be pleased to
           answer questions at this time.




(709217)   Page 25                                 GAO/T-NSIAD-97-110 Defense Contractor
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