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entitled 'Defense Management: DOD Faces Challenges Implementing Its 
Core Competency Approach and A-76 Competitions' which was released on 
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Report to the Ranking Minority Member, Subcommittee on Military 
Readiness, Committee on Armed Services, House of Representatives:

United States General Accounting Office:

GAO:

July 2003:

Defense Management:

DOD Faces Challenges Implementing Its Core Competency Approach and A-76 
Competitions:

GAO-03-818:

GAO Highlights: 

Highlights of GAO-03-818, a report to the Ranking Minority Member, 
Subcommittee on Military Readiness, Committee on Armed Services, House 
of Representatives 

Why GAO Did This Study:

The Department of Defense (DOD) is pursuing a new initiative involving 
a core competency approach for making sourcing decisions—that is, 
sourcing decisions based on whether the function is core to the 
agency’s warfighting mission. In determining how to best perform non-
core functions, DOD’s position is that its components should look 
beyond just the use of public-private competitions under Office of
Management and Budget (OMB) Circular A-76 in making sourcing 
decisions, and consider other alternatives such as partnering or 
employee stock ownership. GAO was asked to assess (1) the department’s 
progress in assessing its core functions as a basis for sourcing 
decisions, (2) the plans and progress DOD has made in identifying and 
implementing alternatives to A-76, and (3) the current status of DOD’s 
A-76 program.

What GAO Found:

Progress in assessing core functions has been varied and limited 
across major Defense components, affected somewhat by ambiguous 
definitions of the term “core function.” In some instances additional 
guidance was obtained, but definitions of core remain somewhat broad 
and subjective, and will likely remain so in the future. Army and Air 
Force have led within DOD in assessing core functions, but the Army 
has done the most, and found, contrary to its expectations, that 
distinguishing between core and non-core functions does not, by 
itself, prescribe a sourcing decision. Other factors must also be 
considered such as risk and operational considerations.

The range of alternatives to A-76 likely to be pursued under the core 
competency-based approach is not yet clear, but DOD has made some 
progress toward identifying and/or using some alternatives through 
pilot projects and other efforts by the services as they have focused 
on the core initiative. However, the use of alternatives could be 
limited without special legislative authorities and/or repeal of 
various existing prohibitions, and some could be tempered by the 
department’s efforts to meet the A-76 competitive sourcing goals set 
by OMB. 

DOD reported that as of June 1, 2003, it has met OMB’s short-term goal 
to use the A-76 process to study 15 percent of the positions 
identified in DOD’s commercial activities inventory by the end of 
fiscal year 2003. However, meeting the longer-term goal to study at 
least 50 percent (226,000) of its nearly 453,000 commercial activity 
positions through fiscal year 2008 will present a challenge. This is 
nearly double the number of positions that DOD has previously studied 
during a comparable time period, and providing sufficient resources 
(financial and technical) to complete the studies may prove 
challenging. Also, the defense components, particularly the Air Force, 
plan to transfer certain military personnel into warfighting functions 
and replace them with government civilian and/or contractor personnel. 
This will require the components to reprioritize their funding for 
operation and maintenance accounts, because it is from those accounts 
the services must fund replacement civilian or contractor personnel.

What GAO Recommends:

GAO is recommending that DOD clarify its expectations for sourcing 
decisions based on core competency assessment results and provide 
guidance on additional factors that should be considered in reaching a 
sourcing decision; and ensure that conversion of functions from 
performance by military to government civilian or contractor personnel 
have clearly identified sources of funding to support those decisions. 
The department generally concurred with the recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-03-818.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Barry W. Holman at (202) 512-8412 or 
holmanb@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Progress in Assessing Core Functions Has Varied Across the Defense 
Components and Has Been Affected Somewhat by Definitions of "Core":

Some Progress Made in Identifying Alternative Sourcing Arrangements, 
but the Extent to Which Alternatives Are Likely to Be Used Is Unclear:

DOD Expected to Maintain an Active A-76 Competitive Sourcing Program:

Conclusions:

Recommendations:

Agency Comments and Our Evaluation:

Scope and Methodology:

Appendix I: Alternatives to A-76 for Sourcing Non-Core Competencies:

Appendix II: Army's Plans for Transforming Its In-House 
Industrial Facilities:

Appendix III: Senior Executive Council Definitions of Core Competency:

Appendix IV: Pioneer Projects:

Appendix V: Comments from the Department of Defense:

Appendix VI: GAO Contact and Staff Acknowledgments:

Related GAO Products:

Tables:

Table 1: Pioneer Projects Submitted to OMB:

Table 2: DOD Positions Announced for Study under A-76, by Component, 
Fiscal Years 1997-2002:

Table 3: Number of Positions for Which A-76 Studies Have Been 
Completed, by Component, Fiscal Years 1997-2002:

Table 4: Number of Positions for Which A-76 Studies Are Ongoing, by 
Component and Year When Study Was Announced, Fiscal Years 1999-2003:

Figure:

Figure 1: DOD's A-76 Positions Completed and OMB's Goal, Fiscal Years 
1997-2008:

Abbreviations:

AMC: U.S. Army Materiel Command:

CAMIS: Commercial Activities Management Information System:

CINC: commander-in-chief:

DFAS: Defense Finance and Accounting Service:

DLA: Defense Logistics Agency:

DOD: Department of Defense:

ESOP: Employee Stock Ownership Plans:

FAIR: Federal Activities Inventory Reform Act:

NSA: National Security Agency:

OMB: Office of Management and Budget:

TBC: Transitional Benefit Corporations:

United States General Accounting Office:

Washington, DC 20548:

July 15, 2003:

The Honorable Solomon P. Ortiz 
Ranking Minority Member 
Subcommittee on Military Readiness 
Committee on Armed Services 
House of Representatives:

Dear Mr. Ortiz:

The Department of Defense (DOD) is currently examining a core 
competency-based approach for making sourcing decisions--that is, the 
decision to use a public or private sector source to perform a 
necessary agency function or activity based on whether the function or 
activity is core to the agency's mission.[Footnote 1] This is one of 
the business transformation initiatives that have been endorsed by one 
of DOD's high-level management committees, the Senior Executive 
Council.[Footnote 2] It believes that the department should focus its 
energies and talents on those functions that are core or directly 
linked to its warfighting mission, and which must be performed by the 
agency, with the expectation that necessary products or services 
associated with non-core functions should be obtained from other 
government agencies or the private sector.

In determining how to best perform non-core functions, DOD's 
position is that its components should look beyond just the use of 
Office of Management and Budget (OMB) Circular A-76, with its focus 
on public-private competitions, in making sourcing decisions. It has 
expressed interest in examining the use of other alternatives, such 
as public-private partnering, transferring functions to other 
agencies, employee stock ownerships, and quasi-government 
corporations. Nevertheless, Circular A-76 remains an important tool for 
making sourcing decisions for non-inherently governmental functions 
typically involving commercially available services. Also, A-76 
competitive sourcing is a major initiative under the President's 
Management Agenda[Footnote 3] and OMB has set ambitious goals for those 
competitions.

At your request, we examined DOD's plans for sourcing non-core 
functions and the effect this may have on its A-76 program. 
Accordingly, we assessed (1) the department's progress in assessing its 
core functions as a basis for sourcing decisions, (2) the plans and 
progress DOD has made in identifying and implementing alternatives to 
A-76, and (3) the current status of DOD's A-76 program.

In performing work for this review, we obtained and analyzed plans 
available from DOD and its components for assessing non-core functions 
and identifying alternate sourcing approaches, and reviewed relevant 
documents from DOD agencies. We met with officials from the Office of 
the Secretary of Defense, the Army, the Navy, the Air Force, the Marine 
Corps, the Defense Logistics Agency, and other organizations to obtain 
information on their sourcing programs and efforts to identify 
alternative sourcing options. The A-76 data used in this report are 
derived from a Web-based DOD commercial activities database; we did not 
validate the information in this database. Further details on our scope 
and methodology are included at the end of this report.

Results in Brief:

Progress in assessing core functions has been varied and limited across 
major Defense components[Footnote 4] and has been challenging. Multiple 
and somewhat ambiguous definitions of what constitutes a core function 
have made it difficult for the components to easily employ the core 
competency-based approach to decision making. As a result, some 
components have sought additional guidance and/or applied their 
own criteria to identify core functions. Even then, much guidance 
remained somewhat broad in nature and subjective, and will likely 
remain so in the future. The Army has made the most progress to 
identify core and non-core functions, having completed core competency 
determinations for over 200,000 positions, but has had to deal with 
numerous appeals to its initial core determinations. The Air Force has 
recently completed a more limited effort, focusing predominately on 
military positions. As a result of its core competency-based effort, 
the Air Force identified over 17,000 military positions and almost 
9,000 civilian positions it believes are non-core. The Navy and Marine 
Corps are in the early stages of determining their core functions. The 
Defense Logistics Agency broadly identified its core and non-core 
competencies, but has not identified specific positions as core or non-
core. Meanwhile, through its efforts to operationalize the core 
competency-based approach, the Army discovered that the utility of 
identifying core functions for the purpose of making sourcing decisions 
can have its limitations. More specifically, contrary to its original 
expectations, the Army found that distinguishing between core and non-
core functions may not, by itself, prescribe a sourcing decision. Once 
it has been determined that a function is not core to an agency's 
mission, other factors that are not currently covered in DOD's guidance 
must also be considered, such as risk and operational considerations. 
As a result, this creates some uncertainty regarding how and to what 
extent the Army will use the results of the core analyses and 
potentially has implications for other Defense components as well.

The magnitude of alternate sourcing arrangements that DOD will pursue 
under the core competency-based approach is not yet clear, based on 
limitations in core assessments conducted to date and due to legal and 
other constraints that could impact use of alternate arrangements. Even 
so, DOD has made some progress toward identifying and using some 
sourcing arrangements that are alternatives to A-76, including some 
identified as part of an initiative to identify alternatives through 
use of pilot projects,[Footnote 5] and a few others that have been 
identified by the services as they have focused on the core initiative. 
For example, in an effort to stimulate consideration of alternatives, 
DOD tasked each of its components with identifying at least one non-
core competency pilot project and developing plans to transition the 
affected functions out of DOD using alternatives to A-76 competition. 
Six pilot projects have been approved and are in varying stages of 
implementation. They range from divestiture to partnering with 
municipalities for services, with the latter expected to be used as a 
model for more widespread implementation. Beyond those six pilot 
projects, department officials told us about two additional projects 
under way that would transfer certain functions to other agencies. At 
the same time, various officials told us that legislative restrictions-
-such as those that restrict outsourcing--and OMB's emphasis on 
competitive sourcing under A-76 could impact the extent to which 
alternatives are used.

While the department continues to examine the potential for 
implementing its core concept and alternative sourcing plans, it is 
also actively maintaining an A-76 competitive sourcing program. This is 
largely due to the emphasis on competitive sourcing in the President's 
Management Agenda and the A-76 goals set by OMB. Building on its 
ongoing A-76 program, DOD reported that as of June 1, 2003, it has met 
OMB's short-term goal to study 15 percent of the positions that the 
department identified in its year 2000 commercial activities inventory 
by the end of fiscal year 2003. Meeting the longer-term goal of 
studying at least 50 percent of its nearly 453,000 commercial activity 
positions[Footnote 6] through fiscal year 2008 could present a 
challenge because the goal requires studying far more positions--nearly 
double--than DOD has previously studied under a comparable time period. 
If the history of DOD's A-76 program is a guide, the department could 
face other challenges associated with studying such sizeable numbers of 
positions. These challenges include providing sufficient time and 
resources to complete the studies, and encountering difficulties in 
identifying and grouping positions for study. Another challenge to 
completing OMB's A-76 goals involves the defense components' plans, 
particularly the Air Force, to convert a sizeable number of military 
positions to performance by government civilian or contractor 
personnel, either as a result of the core-competency process or through 
A-76 studies. Although precise numbers are not available for each of 
the components, the services have indicated they plan to use such 
conversions to transfer the affected military personnel and their slots 
to fill other priorities, rather than reduce authorized military end-
strength. To do so will require the services to reprioritize their 
funding for operation and maintenance accounts, because it is from 
those accounts the services must fund replacement civilian or 
contractor personnel.[Footnote 7]

This report contains recommendations for additional guidance in making 
sourcing decisions based on core assessments and to ensure conversion 
of functions from performance by military to civilian or contractor 
personnel are accompanied by identified sources of funding to support 
those decisions. In commenting on a draft of this report, the 
department generally concurred with our recommendations.

Background:

Since 1955, the executive branch has encouraged federal agencies to 
obtain commercially available goods and services from the private 
sector when the agencies determined that such action was cost-
effective. OMB formalized the policy in its Circular A-76, issued in 
1966. In 1979, OMB supplemented the circular with a handbook that 
included procedures for competitively determining whether commercial 
activities should be performed in-house, by another federal agency 
through an Interservice Support Agreement, or by the private sector. 
OMB has updated this handbook three times since 1979. An extensive 
revision to Circular A-76 was issued on May 29, 2003, based in part on 
the recent work of the congressionally mandated Commercial Activities 
Panel.[Footnote 8]

Under the newly revised circular, agencies may convert commercial 
activities to or from contractor performance through a public-private 
competition, whereby the estimated cost of public or private 
performance of the function is evaluated against published selection 
criteria in accordance with the principles and procedures outlined in 
the circular.[Footnote 9] As part of this process, the government 
identifies the work to be performed in a "performance work statement," 
prepares an in-house offer which includes its most efficient 
organization, and compares all the offers against each other and the 
selection criteria. The revised circular provides several alternative 
procedures for conducting source selections, only one of which allow 
agencies to select a contract based on other than the lowest cost 
technically acceptable offer.[Footnote 10] The four source selection 
alternatives are: sealed bid, lowest price technically acceptable, 
phased evaluation, and, in certain cases, trade-off (which permits 
agencies to weigh cost and non-cost factors).

Administrative and legislative constraints from the late 1980s through 
1995 resulted in a lull--and even a moratorium--on awarding contracts 
resulting from A-76 competitions. In 1995, congressional and 
administration initiatives placed more emphasis on A-76 as a means of 
achieving greater economies and efficiencies in operations. Beginning 
about 1995, DOD began to give renewed emphasis to the use of A-76 
competitive sourcing under Circular A-76. More recently, competitive 
sourcing has received governmentwide attention, as one of five 
initiatives of the President's Management Agenda for fiscal year 2002. 
DOD has been a leader among federal agencies in using A-76 in recent 
years.

The revised circular requires agencies to prepare two annual 
inventories that categorize all activities performed by government 
personnel as either commercial or inherently governmental.[Footnote 11] 
A similar requirement was included in the 1998 Federal Activities 
Inventory Reform (FAIR) Act,[Footnote 12] which directs agencies to 
develop annual inventories of their positions that are not inherently 
governmental. DOD's 2000 FAIR Act inventory identified nearly 453,000 
in-house civilian positions engaged in a variety of commercial 
activities, nearly 260,000 of which have been, or are, subject to 
competition or direct conversion under Circular A-76. The number 
of positions subject to A-76 is less than the total number of positions 
in commercial activities because DOD made adjustments to 
exclude certain commercial activities from being considered eligible 
for competition; they included such reasons as statutory, national 
security, or operational considerations. Under the President's 
Management Agenda, OMB has directed agencies to directly convert or 
compete through cost comparison studies 15 percent of their total 
fiscal year 2000 inventories of commercial activities by the end of 
fiscal year 2003, with the ultimate goal of competing at least 
50 percent of their inventories by the end of fiscal year 2008.

In providing guidance for determining whether activities and functions, 
and associated positions are considered to be inherently governmental 
in nature, DOD has sometimes equated the term "inherently governmental" 
with the somewhat parallel term "core."[Footnote 13] While use of the 
term "core" is associated with the private sector, DOD has sometimes 
used the term to designate military and civilian essential positions 
required for military and national security reasons. The old A-76 
Handbook provided yet another, but similar, meaning for core. In the 
context of A-76, core capability was defined as "a commercial activity 
operated by a cadre of highly skilled employees, in a specialized 
technical or scientific development area to ensure that a minimum 
capability is maintained.":

The concept of core in DOD has also been associated with legislative 
requirements to establish core logistics capabilities in government-
owned military maintenance depots. This process is based on a 
requirement contained in 10 U.S.C. 2464 to identify and maintain within 
government-owned and -operated facilities a core logistics capability 
including the equipment, personnel, and technical competence required 
to maintain weapon systems identified as necessary for national defense 
emergencies and contingencies. Regardless of usage, determinations of 
core and inherently governmental functions within DOD have often been 
viewed as somewhat subjective in nature.

The term "core function" recently has gained increased and more 
expanded use within DOD, beginning with DOD's publication of its 
September 2001 Quadrennial Defense Review Report, which recommended the 
identification of core and non-core functions.[Footnote 14] According 
to the report, "only those functions that must be performed by DOD 
should be kept by DOD. Any function that can be provided by the private 
sector is not a core government function." The test to separate core 
and non-core functions would be to determine whether a function is 
directly necessary for warfighting, according to the report.

Further emphasis on assessing core functions subsequently came from 
DOD's Senior Executive Council,[Footnote 15] which, in April 2002, 
launched a departmentwide effort to distinguish between core and non-
core functions with an emphasis on retaining in-house only those 
functions deemed core to the warfighting mission. Under this approach, 
it tasked the defense components with developing plans to transition 
non-core functions to alternative sourcing arrangements or A-76 
studies, if appropriate, as soon as possible. In advocating the use of 
alternatives, the Senior Executive Council noted that A-76 cost 
comparisons were lengthy, expensive, and hard on the workforce. 
Examples of alternate sourcing strategies cited by the Council included 
public-private partnering, employee stock ownership, and quasi-
governmental organizations. Details about these and other alternatives 
can be found at appendix I. While use of A-76 studies was still 
permitted, emphasis was expected to be given to identifying alternate 
sourcing approaches that might be used to transfer non-core functions 
out of the department.

Much publicity to this new core emphasis surrounded Army's efforts 
under its program, which it designated as "the Third Wave." The term 
"Third Wave" was used to distinguish this current effort from two 
previous sourcing efforts under A-76, the first occurring largely in 
the 1980s and the second beginning in the 1996-97 time period. Unlike 
the earlier two waves, which focused on A-76 studies of about 25,000 
and 33,000 positions respectively, the scope of the Third Wave was to 
be significantly larger, potentially involving over 200,000 positions. 
This was of significant concern to government employees after several 
years of A-76 study efforts within DOD. The Army's program also 
received much public attention because of what Army officials have 
characterized as an unrelated, but parallel, effort to have a 
contractor (RAND) study options for rethinking governance of the Army's 
arsenals and manufacturing plants.[Footnote 16] The Army has 
subsequently indicated it does not plan to pursue the options outlined 
in that study which ranged from privatization to creation of a federal 
government corporation to operate these facilities. On March 24, 2003, 
the Secretary of the Army directed that other action plans be developed 
to deal with these facilities. (See app. II for a summary of the 
actions directed.):

Progress in Assessing Core Functions Has Varied Across the Defense 
Components and Has Been Affected Somewhat by Definitions of "Core":

Progress in assessing core functions has been varied and limited across 
the major Defense components, and affected by somewhat ambiguous and 
subjective definitions of what constitutes a "core function." These 
multiple and somewhat ambiguous definitions of what is a "core 
function" have made it difficult for the components to easily employ 
the core competency approach to decision-making, and some DOD 
components have sought additional guidance and/or applied their own 
criteria to identify core functions. Even so, progress in assessing 
core functions has varied across the components, with the Army and the 
Air Force having made the most progress in their efforts. In addition, 
the Army, which has devoted the greatest attention to assessing core 
functions, has found that distinguishing between core and non-core 
functions, by itself, has limited value because that distinction alone 
does not necessarily prescribe a sourcing decision.

Guidance in Defining Core Has Been Broad and Additional Guidance 
Sought:

DOD guidance to define a core function under the new program 
emphasis has been broad and, as a result, there are multiple and 
somewhat ambiguous definitions of "core," leading some DOD components 
to seek additional guidance. The term "core" has had different meanings 
depending upon the context in which it was used. Moreover, there has 
been and remains a significant amount of subjectivity in defining 
"core" as there has been with the term "inherently governmental." 
Recognizing the potential difficulty in applying the core competency-
based approach, the Senior Executive Council provided several 
definitions of "core" as well as criteria for determining core 
competencies in its April 2002 implementing memo.

As a starting point for its core-competency emphasis, a work group 
commissioned by the Senior Executive Council chose a business concept 
outlined in a 1990 Harvard Business Review article.[Footnote 17] The 
article provides several examples of corporations that identified their 
core competencies, helping them to become more successful than their 
competitors. The authors likened a diversified corporation to a 
business tree. For example, the trunk and major limbs are core 
products; the smaller branches are business units. While admitting this 
concept is difficult to apply to DOD, the Senior Executive Council 
nonetheless translated that business tree to a military application--
the core services were described as the set of activities that actually 
contribute to the value of the end product (land, sea, and air 
operations), the business units were the units of a component command, 
the end products were military effects, and the customer was the 
combatant commander employing forces and resources.

In adapting the definition of "core" from the Harvard Business Review 
article to the DOD environment, the Senior Executive Council defined 
core as "A complex harmonization of individual technologies and 
'production' (employment, delivery) skills that create unique military 
capabilities valued by the force employing [commander in chief]!" 
Several additional definitions were provided in the Council's April 
2002 memo to help clarify the reader's understanding of the definition 
(see app. III). According to the memo, however, there are three themes 
common to each definition: (1) the knowledge and experience acquired by 
people, (2) the discrete and finite set of technologies the people 
employ, and (3) the business objectives to be achieved. It stated that 
DOD's business objective to be achieved is warfare.

The Senior Executive Council's memo also provided some criteria for 
determining core competencies. According to the Council, a core 
competency:

* has potential application to a wide variety of national security 
needs,

* provides a significant contribution to the combatant commander's 
desired effect,

* would be difficult for competitors to imitate,

* provides the means to differentiate from competitors,

* crosses organizational boundaries within an enterprise,

* is a direct contributor to the perceived value of the service,

* does not diminish with use,

* deploys with forces, and:

* provides training and experience that forms the basis of ethos and 
culture.

The memo also noted that these criteria are not "pass/fail" criteria. 
That is, some criteria may help to identify core competencies while 
others may not, and that these criteria are based on business concepts 
that have been adapted to the military domain. Furthermore, the memo 
stressed the importance of senior leadership judgment in identifying 
core competencies.

According to various officials, the lack of a clear and concise 
definition of the terms related to the core concept initially made it 
difficult for the Army and Air Force to apply the core concept to their 
functions. Both services have subsequently supplemented the Senior 
Executive Council definitions with their own internal documents and 
specific guidance, which are discussed in the next sections.[Footnote 
18] That notwithstanding, the definition of core remains somewhat broad 
in nature and subjective, and will likely remain so in the future. The 
Navy and Marine Corps have only recently begun their efforts to 
identify core functions, and have not yet sought to develop additional 
guidance. A Defense Logistics Agency official told us they did not use 
any additional guidance.

DOD and service officials told us that while the concepts "inherently 
governmental" and "core" are similar and may overlap, they may not 
always be the same. Specifically, not all inherently governmental 
functions would be considered core, nor would all core functions be 
designated inherently governmental. For example, according to Army 
analysis, many civil functions performed by the Army Corps of 
Engineers, such as wetlands regulation and eminent domain authority, 
are inherently governmental, but they are not core to the Army's 
mission. Conversely, we were told, certain medical services provided by 
doctors and nurses in the operating forces are not deemed to be 
inherently governmental; however, these services are considered to be 
core to the Army's mission.

Progress on Identifying Core Functions Has Varied:

The Senior Executive Council directed the services and defense agencies 
to inventory their organizations and identify their core functions, but 
only the Army and Air Force have made much progress in doing so. The 
Army took the lead in pursuing this initiative and has recently 
completed an effort to identify its core and non-core functions. The 
Air Force also initiated a core competency review, which focused 
predominately on military positions. The Navy and Marine Corps are in 
the early stages of assessing their core functions. The Defense 
Logistics Agency broadly identified its core and non-core competencies, 
but has not identified specific positions as core or non-core.

Army Efforts Recently Completed:

The Army has recently completed an effort to identify its core and 
non-core functions for over 200,000 positions. Initially, the Army's 
Third Wave program assumed that all commercial positions were non-core 
and thus potential candidates for performance by the private sector or 
other government agencies. However, it permitted its components to 
request exemption from the non-core designation and, as a result, 
considered appeals involving numerous functional areas. Some were 
sustained while others were not. The results of this process differed 
somewhat from the Army's initial expectations that all non-core 
functions could be subject to competition or alternate sourcing, and 
the number of positions likely to be subject to alternate sourcing is 
not yet clear.

In permitting its components to present a case for functions to be 
exempt from the non-core designation, the Army provided specific 
guidance on the submission of exemption requests and the factors to be 
used to evaluate those requests. An exemption request needed to provide 
a compelling case that a non-core designation could pose substantial 
and specific risks to core warfighting missions or would violate a 
statutory requirement affecting a function. The Army components 
submitted 24 requests for exemption from non-core designation, each 
representing one or more broad functional areas. For example, these 
areas included civilian personnel, installation management, law 
enforcement and criminal investigations, and both military and civilian 
career progression activities.

The Army's authority for reviewing and approving core-competency 
exemption requests was the Assistant Secretary of the Army for Manpower 
and Reserve Affairs. In evaluating the exemption requests, the Office 
of Manpower and Reserve Affairs supplemented the Senior Executive 
Council's definitions of core with six core competencies identified by 
the Army in Army Field Manual 1 and other documents. The six 
competencies were depicted as:

* Shape the security environment--provide a military presence.

* Prompt response--provide a broad range of land power options to shape 
the security environment and respond to natural or manmade crises 
worldwide.

* Forcible entry operations--provide access to contested 
areas worldwide.

* Mobilize the Army--provide the means to confront unforeseen 
challenges and ensure America's security.

* Sustained land dominance--provide capabilities to control land and 
people across various types of conflicts.

* Support civil authorities--provide support to civil authorities in 
domestic and international contingencies, including homeland security.

After evaluating the appeals, the Army, in some instances, sustained 
the exemption requests, while, in other instances, they were denied. 
However, in many instances a mixed decision was rendered regarding 
individual functions within a broad functional area. This is 
illustrated by the Army's determination of core competencies for two 
functions--medical services and information resources.

In making its decisions, Army officials determined that medical 
activities could be considered core in some circumstances and non-core 
in others. The Army also found that, in some cases, functions 
considered to be core--such as information resources--contained 
elements that were designated non-core.

The Army determined that many medical functions are core to the Army's 
mission even though they are not classified as inherently governmental. 
The Army recognizes that medical functions do not require unique 
military knowledge or skills or recent experience in the operating 
forces to be performed. However, for troops deployed in theater (i.e., 
a war zone), medical functions do need to be performed by in-house 
personnel because reliance on host nation contracting for medical 
support could place significant risks on the Army forces. The Army has 
determined that the in-theater medical mission is a critical element of 
the Army's ability to accomplish its core competencies. Even so, 
certain functions within the medical area can be considered both core 
and non-core. For example, the optical fabrication function--which is 
the ability to produce eyewear (replacement spectacles and protective 
mask inserts)--is considered a core competency in support of the 
operational forces close to the point of need in the area of 
engagement. However, this same function performed in the United States 
is not considered to be a core competency, and the Army states that 
this function may be reviewed for divestiture or privatization.

Within the information resources function, the Army considers the 
management of information resources in a network-centric, knowledge-
based workforce to be a core warfighting competency. This core 
competency includes information operations that support operating 
forces, and utilizes commercial technology adapted for military 
applications. Organizations and personnel performing functions that 
ensure command, control, and communications interoperability across 
Army, joint, interagency, and coalition forces are core functions and 
need to be kept in-house. However, other information resource 
functions--such as help-desk services--are deemed to be non-core and 
can be considered for possible outsourcing.

Army officials said they recognized that once the determination was 
made that a function was considered to be core or non-core to the 
Army's mission, the sourcing of the function would, in many instances, 
require additional analysis to determine the amount of core capability 
to be kept in-house and the risk the Army might face by sourcing the 
function. The types of risk to be considered in evaluating impacts upon 
a core mission are force management, operational, future challenges, 
and institutional.[Footnote 19] Additional factors must also be 
considered. For example, the Army determined that its casualty and 
mortuary affairs function is not a core mission, nor is it an 
inherently governmental function. However, national policy dictates 
that Army officials notify families of a casualty in person.

Overall, the Army found the results of its review were somewhat 
contrary to its, and the Senior Executive Council's, initial 
expectation that all non-core functions should be subject to 
competition or alternative sourcing. As noted previously, the Army 
found the designation of "core" does not necessarily indicate military 
or government civilian performance is required or necessarily precludes 
competitive sourcing of the function. That is, a designation of "non-
core" does not automatically mean that a function can, or should, be 
contracted out--other factors must also be considered. As a result, 
this has led to some uncertainty regarding how and to what extent the 
results of the Army's core analyses will be used in sourcing decisions 
and this potentially has implications for other Defense components as 
well. While at this point, the Army is still deciding how to proceed 
with implementing the results of its core assessments, Army officials 
told us that the core decisions would be reflected in the Army's 2003 
FAIR Act inventory.

Air Force Efforts Focus on Military Positions:

The Air Force focused its initial core competency review predominately 
on military positions. This was done because the Air Force wanted to 
identify functions performed by military personnel that might be 
realigned for civilian or contractor performance, thus permitting 
affected military personnel to be reassigned to operational areas where 
shortages of military personnel existed. All military positions were 
reviewed in terms of three main core competencies and six distinctive 
capabilities. The three institutional core competencies were depicted 
as:

* Developing Airmen (the heart of combat capability).

* Technology to Warfighting (the tools of combat capability).

* Integrating Operations (maximizing combat capability).

Six distinctive Air Force capabilities also considered were those 
related to:

* Precision engagement--the ability to locate the objective or target, 
provide responsive command and control, generate the desired effect, 
assess the level of success, and retain the flexibility to reengage.

* Rapid global mobility--the ability to rapidly and flexibly respond to 
the full spectrum of contingencies worldwide.

* Information superiority--the ability to collect, control, exploit and 
defend information while denying the adversary the same.

* Agile combat support--the ability to provide combat support in a 
responsive, deployable, and sustainable manner.

* Air and space superiority--the ability to establish control over the 
entirety of air and space, providing freedom from attack and freedom to 
attack.

* Global attack--the ability to find, fix, and attack targets anywhere 
on the globe.

Although the core competency review process did involve some subjective 
judgment, each position was classified into three basic categories--
those (1) requiring military performance, (2) requiring government 
civilian performance, and (3) available for contractor consideration. 
As a result of this review, 17,800 military positions were identified 
for potential conversion to either government civilian or contractor 
civilian positions. Our prior work has identified various instances 
where personnel costs are generally less for civilian personnel than 
for military.[Footnote 20] An additional 4,477 military positions were 
identified for possible future realignment through other reengineering 
efforts, such as adjusting the manpower requirements process and 
conducting a business case analysis for alternative installation 
support practices, for a total of 22,277 military positions. Because 
many of the functions reviewed involved both military and civilian 
personnel, an additional 8,900 Air Force civilian positions were 
identified for possible conversion to contractor performance. An Air 
Force official stated that the service hopes to do a more in-depth 
review on the civilian side in the future; however, at the moment, none 
is planned. The Air Force expects the number of positions that can be 
competed in its FAIR Act inventory will be increased as a result of 
this review.

In the near-term, as a direct result of the core function review, the 
Air Force has indicated it plans to outsource a significant portion of 
the workload of its Pentagon Communications Agency currently performed 
by over 400 military personnel. Although Air Force officials indicated 
the service has the resources to implement this action, other efforts 
may have to be postponed until the funds are available. To 
move military positions to operational warfighting positions, 
additional government civilian or contractor personnel would be needed 
to replace the military personnel. Air Force officials told us that 
moving the military personnel out of non-core functions is a high 
priority, but because of the high cost involved in adding funds to the 
operations and maintenance appropriation account to pay for replacement 
civilian or contractor positions, it is currently an unfunded 
priority.[Footnote 21] They recently estimated this additional cost to 
be about $5 billion over the next 5 years. Moreover, in its internal 
budget planning documents for fiscal year 2004, the Air Force stated 
that its number one unfunded priority is funding ($2.34 billion) for 
moving the initial 6,300 military positions out of non-core functions. 
As a result, it is not yet clear to what extent larger number of 
conversions would take place and the extent to which they might involve 
direct conversions or be done as part of public-private competitions 
using the A-76 process.

Other DOD Component Efforts Are Not as Advanced:

As mentioned earlier, the Marine Corps has recently begun its effort to 
identify core functions and has convened a working group to determine 
how to proceed. The Secretary of the Navy tasked the Navy components 
to determine their core competencies on April 18, 2003, so this effort 
is still in its infancy. The Defense Logistics Agency has identified 
four core competencies--customer knowledge, integrated combat 
logistics solutions, rapid worldwide response, and single face to 
industry and customers. In addition, it identified 10 non-core 
competencies. These are: base operations; warehousing services; 
transportation services; document automation, printing and production 
services; marketing of unneeded materiel; computer application 
software; computer operations and database management support; 
cataloging; payroll services; and civilian personnel services. However, 
it has not determined which positions are considered to be core.

Some Progress Made in Identifying Alternative Sourcing Arrangements, 
but the Extent to Which Alternatives Are Likely to Be Used Is Unclear:

The range of alternatives to A-76 likely to be pursued under the core 
competency-based approach is not yet clear given limitations in the 
core analyses, but DOD has made some progress toward identifying and/or 
using some sourcing arrangements that are alternatives to A-76. Some 
were identified as part of an initiative to identify alternatives 
through the use of pilot projects, and a few others have been 
identified by the services as they have focused on the core initiative. 
At the same time, some DOD officials indicated that the use of some 
alternatives could be limited without special legislative authorities 
and/or repeal of various existing prohibitions. The use of alternative 
sourcing could also be affected by the emphasis on A-76 competitions 
and OMB's goals for the department.

Alternate Sourcing Approaches Identified through Pilot Projects 
and Other Initiatives:

DOD has made some progress in identifying and using sourcing 
arrangements that are alternatives to A-76, including some as part of 
an initiative to identify alternatives through use of pilot projects, 
and a few others that have been identified by the services as they have 
focused on the core initiative. These projects are in various stages of 
implementation.

DOD's Senior Executive Council and Business Initiative Council[Footnote 
22] asked the components to identify and submit at least one pilot or 
"pioneer" project to provide alternative sourcing methods for 
widespread implementation. Ten projects were approved by the Business 
Initiative Council and were then submitted to OMB for approval. OMB 
approved eight projects in August 2002. The department later withdrew 
two projects because the timing was not appropriate. The following 
table provides a listing of the 10 Pioneer Projects. (A description of 
the ongoing pioneer projects can be found in app. IV.):

Table 1: Pioneer Projects Submitted to OMB:

Title: Reengineer existing information technology structure; Proposed 
sourcing method: Streamlined A-76; Approved by OMB.

Title: Metalworking machinery repair/rebuild services; Proposed 
sourcing method: Waiver to A-76; Approved by OMB.

Title: Desk top management services; Proposed sourcing method: New 
requirement; Approved by OMB.

Title: Groundbreaker II (information technology support); Proposed 
sourcing method: New requirement; Withdrawn by DOD.

Title: Municipal services partnership for base support; Proposed 
sourcing method: Direct service contract (legislation required); 
Approved by OMB.

Title: Randolph Air Force Base MEO (Most Efficient Organization) 
developed with an A-76 competition to follow at a later date; Proposed 
sourcing method: Reengineering; Disapproved by OMB.

Title: Revitalize and reshape the workforce; Proposed sourcing method: 
Reengineering; Disapproved by OMB.

Title: Ophthalmic services; Proposed sourcing method: Divestiture;
Approved by OMB.

Title: Brooks city-base partnership; Proposed sourcing method: 
Divestiture; Approved by OMB.

Title: White House Communication Agency military manpower; Proposed 
sourcing method: Military conversion; Withdrawn by DOD.

Source: DOD.

[End of table]

The projects propose to use a variety of alternatives, including 
partnering and divestiture, and are in varying stages of 
implementation, as noted in appendix IV. For example, the Army 
previously developed a partnership with the city of Monterey, 
California, to provide municipal services needed for the operation of 
DOD assets in Monterey County. Because of the success of this project, 
the Army submitted legislation to Congress that would allow contracting 
for municipal services defense-wide.[Footnote 23] In another example, 
the Navy has identified optical (eyewear) fabrication as a potential 
candidate for divestiture, because that service is readily available in 
the private sector. However, this project is still in the conceptual 
phase and no decision will be made until a thorough analysis has been 
completed to determine the most appropriate sourcing method.

DOD was required to go to OMB for approval of these Pioneer Projects to 
determine if they would count toward the competitive sourcing goals set 
by OMB. The criteria for OMB approval required that projects involve an 
element of divestiture, competition, or the transfer of responsibility 
to other private or public sector performers. The two pilot Pioneer 
Projects that were not approved by OMB had proposed using reengineering 
or the development of most efficient organizations as an alternative to 
A-76 competition. These two projects were not approved because they 
neither involved the divestiture of responsibility for performing the 
function nor contained a near-term element of competition. DOD 
officials withdrew two others because they believed timing was not 
appropriate for those actions.

In responding to OMB's draft of its most recent revision to Circular 
A-76,[Footnote 24] we stressed the importance of considering 
alternative approaches to accomplishing agency missions. Such 
approaches encompass a wide range of options, including restructuring, 
privatizing, transferring functions to state and local governments, 
terminating obsolete functions, and creating public-private 
partnerships. Given that these options can result in improved 
efficiency and enhanced performance, we recommended at that time that 
OMB continue to encourage agencies to consider these 
and other alternatives to A-76 competition. The revised circular allows 
agencies to deviate from certain requirements of the circular with 
prior written approval from OMB. For example, agencies are permitted to 
explore innovative alternatives, including public-private 
partnerships, public-public partnerships, and high performing 
organizations, with prior written approval from OMB for a specific 
competition.

In addition to these Pioneer Projects, some other initiatives to use an 
alternate sourcing approach have emerged within the military services. 
For example, the department plans to transfer its personnel security 
investigations function, now performed by the Defense Security Service 
to the Office of Personnel Management. In another instance, the 
Secretary of the Army recently determined that the long-term 
incarceration of prisoners was not a core competency of the Army. The 
department is in the process of finalizing plans for transferring its 
military-dedicated prison at Fort Leavenworth, Kansas,[Footnote 25] to 
the Federal Bureau of Prisons. Although exact savings from this 
transfer have not yet been determined, an Army official stated that 
transferring the facility to the Bureau of Prisons would free up almost 
500 military positions. In addition, Army officials believe it will 
allow for efficiency gains because the cost to incarcerate a prisoner 
per year by the Bureau of Prisons is expected to be less than half what 
it costs the Army to do so.

Potential Limitations on Use of Alternatives Exist:

The services have been charged by the Senior Executive Council to 
identify and use sourcing arrangement alternatives to A-76 for their 
non-core functions; however, DOD and the services have encountered 
potential limitations to their efforts. These include legislative 
impediments and the requirement to support the President's Management 
Agenda to meet the competitive sourcing goals of OMB.

Legislation Can Limit Use of Alternatives:

Various officials in the Office of the Secretary of Defense and the 
services expressed uncertainty over the extent to which existing 
legislative prohibitions or the lack of legislative authority could 
limit the pursuit of some alternatives. They noted existing 
prohibitions such as those contained in 10 U.S.C. § 2461,[Footnote 26] 
and section 8014[Footnote 27] of the annual appropriations acts that 
require public-private competition in all but a few circumstances. In 
citing areas where legislation might be needed, they noted that to 
complete the planned transfer of the personnel security investigative 
functions to the Office of Personnel Management, DOD recently submitted 
a legislative request to Congress seeking authority to do so as part of 
its legislative package known as the Defense Transformation for the 
21st Century Act of 2003. Specifically, the legislation would allow DOD 
to transfer this non-core function to the Office of Personnel 
Management, which would allow for consolidation of requests for 
security clearances under this agency. Alternatively, Army officials 
told us that in the initiative to transfer its Fort Leavenworth prison 
to the Federal Bureau of Prisons, they did not believe special 
authorizing legislation is required. They believe DOD is not required, 
by statute,[Footnote 28] to maintain prisoners in DOD facilities and 
may use any facility under the control of the U.S. government.

DOD officials have also requested some legislative relief to implement 
some initiatives that they have already identified. For example, DOD 
has requested the repeal of 10 U.S.C. § 2465[Footnote 29] to allow the 
department to bid and compete contracts for security guard services and 
for the performance of firefighting functions at military installations 
in the continental United States.[Footnote 30] DOD believes such 
contracts would be cost-effective and provide a needed flexibility in 
exigent situations, such as September 11, 2001. In another case, DOD 
has sought legislative authority to contract directly with local 
governments for municipal services based on the success of its Pioneer 
Project in Monterey, California. Doing so would allow DOD components to 
use this type of arrangement at other locations, as appropriate.

Supporting the President's Management Agenda May Limit Use of 
Alternatives:

The department, in attempting to meet OMB's goals to conduct A-76 
competitions, is unlikely to pursue alternative sourcing on a large 
scale. One of the five governmentwide initiatives in the President's 
Management Agenda is competitive sourcing. Under this initiative, OMB 
has directed agencies to compete 15 percent of positions deemed 
commercial in their fiscal year 2000 FAIR Act inventories by the end of 
fiscal year 2003, with the ultimate goal of 50 percent by the end of 
fiscal year 2008. For DOD, this represents approximately 226,000 
positions. Although OMB has recently allowed some alternative sourcing 
methods that contain an element of competition to be counted toward 
meeting these goals, DOD expects that the vast majority of positions 
will be competed under A-76 competitions. Positions competed under 
A-76, of course, would not be available for consideration for 
alternative sourcing methods.

While the department initially placed a priority on identifying 
alternative sourcing arrangements, the most recent department guidance 
is less clear regarding the priority of alternate sourcing arrangements 
over A-76 competitions. The Business Initiative Council recently 
directed the defense components to submit the status of their core 
competency reviews and detailed competitive sourcing plans--including 
both A-76 and alternatives to A-76--by June 2, 2003. The Business 
Executive Council will review these plans in preparation for the fiscal 
2005-2009 preliminary budget review. Details on these plans were not 
available at the time we completed our review.

DOD Expected to Maintain an Active A-76 Competitive Sourcing Program:

Limited progress in implementing the core competency-based approach, 
coupled with OMB's emphasis on the use of A-76 in conjunction with the 
President's Management Agenda, suggest that the use of A-76 may remain 
a key vehicle for sourcing decisions involving non-core and non-
inherently governmental functions. Nonetheless, despite its experience 
in implementing competitive sourcing, the department faces a number of 
challenges related to its A-76 program.

OMB Has Established Ambitious A-76 Program Goals for DOD:

OMB has established ambitious A-76 competitive sourcing program goals 
for the department to meet in both the short term and the long term, 
even while DOD is focusing on its core competency approach. The 
department's A-76 goals for the number of positions to be studied and 
the time frames for accomplishing those studies have varied over time, 
reaching a high in 1999 of studying 229,000 positions between 1997 and 
2005. However, DOD experienced difficulty in identifying eligible 
functions for study and consequently, in 2001, reduced the goal to 
study 160,000 positions between 1997 and 2007. Recently, DOD's study 
goals have increased because of OMB's competitive sourcing goals. To 
meet OMB's goal of directly converting or studying 15 percent of the 
453,000 commercial activity positions identified in the 2000 FAIR Act 
inventories by the end of fiscal year 2003, DOD would need to complete 
A-76 studies on about 68,000 positions between fiscal year 2000 and the 
end of fiscal year 2003.[Footnote 31] Then, to meet the larger goal of 
50 percent, DOD would need to study an additional 158,000 positions in 
the out years (fiscal years 2004-08). This represents a total of 
226,000 positions to be studied, far more than DOD has been able to 
complete in a similar time period. Figure 1 illustrates OMB's goals for 
DOD compared to what DOD has completed at the end of fiscal year 2002.

Figure 1: DOD's A-76 Positions Completed and OMB's Goal, Fiscal Years 
1997-2008:

[See PDF for image]

[End of figure]

The strength of DOD's A-76 program is shown in the number of positions 
announced or planned for study, those completed, and those still 
ongoing. Table 2 provides data on the number of positions the 
department has announced for study under its A-76 program since its 
resurgence in 1997.

Table 2: DOD Positions Announced for Study under A-76, by Component, 
Fiscal Years 1997-2002:

Component: Army; Fiscal year: 1997: 10,878; Fiscal year: 1998: 14,430; 
Fiscal year: 1999: 8,757; Fiscal year: 2000: 381; Fiscal year: 2001: 
517; Fiscal year: 2002: 426; Total: 35,389.

Component: Navy; Fiscal year: 1997: 11,460; Fiscal year: 1998: 10,415; 
Fiscal year: 1999: 10,470; Fiscal year: 2000: 6,445; Fiscal year: 2001: 
5,273; Fiscal year: 2002: 2,516; Total: 46,579.

Component: Air Force; Fiscal year: 1997: 5,674; Fiscal year: 1998: 
8,442; Fiscal year: 1999: 8,161; Fiscal year: 2000: 4,124; Fiscal year: 
2001: 1,553; Fiscal year: 2002: 904; Total: 28,858.

Component: Marine Corps; Fiscal year: 1997: 0; Fiscal year: 1998: 0; 
Fiscal year: 1999: 4,324; Fiscal year: 2000: 704; Fiscal year: 2001: 0; 
Fiscal year: 2002: 13; Total: 5,041.

Component: Defense agencies; Fiscal year: 1997: 978; Fiscal year: 1998: 
2,220; Fiscal year: 1999: 3,953; Fiscal year: 2000: 533; Fiscal year: 
2001: 528; Fiscal year: 2002: 3,442; Total: 11,654.

Component: Total; Fiscal year: 1997: 28,990; Fiscal year: 1998: 35,507; 
Fiscal year: 1999: 35,665; Fiscal year: 2000: 12,187; Fiscal year: 
2001: 7,871; Fiscal year: 2002: 7,301; Total: 127,521.

Source: DOD's Commercial Activities Management Information System 
(CAMIS) as of April 2003.

[End of table]

The number of positions planned for study by year for each component 
for fiscal years 2003-08 was not available, but it would seem to 
require much greater numbers of announcements per year than were made 
in recent years. The services are currently determining the number of 
positions they plan to study in future years, including the number of 
military and civilian positions to be studied, and are required to 
submit preliminary data to the Office of the Secretary of Defense by 
June 2, 2003. However, as noted, the total number of positions that 
would be required to be studied for fiscal years 2004-08 to meet OMB's 
target for DOD is a total of 158,000 positions.

Table 3 shows the number of positions completed in A-76 studies since 
1997. Of the total, 48,921 were civilian positions and 19,336 were 
military positions.

Table 3: Number of Positions for Which A-76 Studies Have Been 
Completed, by Component, Fiscal Years 1997-2002:

Component: Army; Fiscal year: 1997: 26; Fiscal year: 1998: 129; Fiscal 
year: 1999: 691; Fiscal year: 2000: 1,538; Fiscal year: 2001: 7,534; 
Fiscal year: 2002: 10,423; Total: 20,341.

Component: Navy; Fiscal year: 1997: 82; Fiscal year: 1998: 234; Fiscal 
year: 1999: 2,936; Fiscal year: 2000: 4,214; Fiscal year: 2001: 5,323; 
Fiscal year: 2002: 2,382; Total: 15,171.

Component: Air Force; Fiscal year: 1997: 1,838; Fiscal year: 1998: 
3,930; Fiscal year: 1999: 2,993; Fiscal year: 2000: 5,915; Fiscal year: 
2001: 6,352; Fiscal year: 2002: 4,450; Total: 25,478.

Component: Marine Corps; Fiscal year: 1997: 0; Fiscal year: 1998: 0; 
Fiscal year: 1999: 0; Fiscal year: 2000: 41; Fiscal year: 2001: 551; 
Fiscal year: 2002: 1,214; Total: 1,806.

Component: Defense agencies; Fiscal year: 1997: 306; Fiscal year: 1998: 
894; Fiscal year: 1999: 361; Fiscal year: 2000: 1,400; Fiscal year: 
2001: 1,008; Fiscal year: 2002: 1,492; Total: 5,461.

Component: Total; Fiscal year: 1997: 2,252; Fiscal year: 1998: 5,187; 
Fiscal year: 1999: 6,981; Fiscal year: 2000: 13,108; Fiscal year: 2001: 
20,768; Fiscal year: 2002: 19,961; Total: 68,257.

Source: DOD Commercial Activities Management Information System data, 
as of March 2003.

[End of table]

Table 4 shows the number of positions being reviewed in ongoing A-76 
studies. Of the total, 23,766 are civilian positions and the remaining 
2,622 are military positions.

Table 4: Number of Positions for Which A-76 Studies Are Ongoing, by 
Component and Year When Study Was Announced, Fiscal Years 1999-2003:

Component: Army; Fiscal year: 1999: 1,605; Fiscal year: 2000: 368; 
Fiscal year: 2001: 277; Fiscal year: 2002: 417; Fiscal year: 2003: 0; 
Total: 2,667.

Component: Navy; Fiscal year: 1999: 2,353; Fiscal year: 2000: 4,622; 
Fiscal year: 2001: 4,118; Fiscal year: 2002: 2,509; Fiscal year: 2003: 
92; Total: 13,694.

Component: Air Force; Fiscal year: 1999: 1,241; Fiscal year: 2000: 264; 
Fiscal year: 2001: 321; Fiscal year: 2002: 876; Fiscal year: 2003: 156; 
Total: 2,858.

Component: Marine Corps; Fiscal year: 1999: 45; Fiscal year: 2000: 489; 
Fiscal year: 2001: 0; Fiscal year: 2002: 13; Fiscal year: 2003: 1,041; 
Total: 1,588.

Component: Defense agencies; Fiscal year: 1999: 1,448; Fiscal year: 
2000: 506; Fiscal year: 2001: 3,046; Fiscal year: 2002: 581; Fiscal 
year: 2003: 0; Total: 5,581.

Component: Total; Fiscal year: 1999: 6,692; Fiscal year: 2000: 6,249; 
Fiscal year: 2001: 7,762; Fiscal year: 2002: 4,396; Fiscal year: 2003: 
1,289; Total: 26,388.

Source: DOD Commercial Activities Management Information System data, 
as of April 2003.

[End of table]

As shown in table 3 above, DOD had already studied over 68,000 
positions through fiscal year 2002, although OMB did not count 
approximately 14,000 positions contained in A-76 studies completed 
during fiscal years 1997-99 toward the 15-percent goal because the 
positions studied were not derived from DOD's 2000 FAIR Act inventory. 
Nonetheless, OMB permitted use of nearly 54,000 of the positions for 
which DOD subsequently completed studies, leaving the department 
approximately 14,000 positions to study by the end of fiscal year 2003. 
DOD recently reported that it has met its 15-percent goal by completing 
competitions in excess of 71,000 positions between October 1,1999, 
through June 1, 2003.

DOD hopes to reach agreement with OMB to meet its additional 
158,000-position study requirement through a combination of A-76 
studies and alternatives to A-76, and change the period of study from 
fiscal years 2004-08 to fiscal years 2005-09. Regardless, this longer-
term goal could be a challenge, requiring completion of a significantly 
larger number of positions for study than has actually been completed 
in similar periods in the past. For example, between fiscal years 1997 
and 2002, DOD completed competition studies for about 68,000 positions. 
Under the new goals, DOD would be required to complete studies 
involving 158,000 positions during a 5-year period between fiscal years 
2004-08. This is more than double what DOD has been able to complete in 
the past during a similar time frame.

DOD Faces Other Challenges in Meeting A-76 Goals:

In addition to size of effort required to meet OMB's out-year study 
goals, DOD faces a number of challenges in meeting OMB's A-76 program 
goals. As we have tracked DOD's progress in implementing its A-76 
program since the mid-to late-1990s, we have identified various 
challenges and concerns that have surrounded the program.[Footnote 32] 
We believe those challenges and concerns are still relevant to the 
department's current A-76 program. They include (1) the time required 
to complete the studies, (2) the cost and other resources required to 
conduct and implement the studies, and (3) the selection and grouping 
of positions to compete.

In addition, as noted earlier, the Army's core competency review has 
shown that the designation of "core" does not necessarily mean that 
in-house employees should perform a function, nor does the designation 
of "non-core" mean a function should necessarily be considered for 
alternative sourcing or A-76 competitions. This may cause further 
difficulties in selecting and grouping functions for A-76 reviews or 
other sourcing alternatives.

OMB's revised A-76 circular states that standard competitions[Footnote 
33] shall not exceed 12 months from public announcement (start date) to 
performance decision (end date). Under certain conditions, a time limit 
waiver of no more than 6 months can be granted. The revised circular 
also states that agencies shall complete certain preliminary planning-
-such as scope, baseline costs, and schedule--before public 
announcement. Even so DOD's studies have historically taken 
significantly longer than 12-18 months. DOD's most recent data indicate 
that the studies take on average 20 months for single-function studies 
and 35 months for multifunction studies. It is not clear how much of 
this time was needed for planning that will now be outside the revised 
circular's study time frame.

Once DOD components found that the studies were taking longer than 
initially projected, they realized that a greater investment of 
resources would be needed than originally planned to conduct the 
studies. We previously reported that the President's 2001 budget showed 
a wide range of projected study costs, from about $1,300 per position 
studied in the Army to about $3,700 in the Navy.[Footnote 34] DOD is 
now estimating costs at $3,000 per position for new studies beginning 
in fiscal year 2004. However, the much larger number of studies 
required to be completed in the out-years to meet OMB's study goals 
could require DOD components to devote much greater total resources to 
this effort than in the past.

In addition, DOD components, particularly the Air Force, are attempting 
to shift military personnel away from commercial type functions to 
those more directly related to warfighting. As noted above, because 
these functions are not being eliminated, new operations and 
maintenance account funds will have to be provided to pay for the 
additional civilians or contractors that perform the function(s) 
currently being performed by uniformed personnel. As previously 
mentioned in the report, the Air Force alone has recently estimated 
this additional cost to be about $5 billion over the next 5 years.

This is an issue other services have also encountered in the past and 
will in the future as they plan to shift military personnel away from 
commercial positions into warfighting positions, either as a result of 
its core assessment or as part of its A-76 studies. We have not seen 
precise, reliable figures on the extent to which these conversions may 
occur, and the extent to which all affected military personnel would be 
needed in warfighting positions. In the past we identified instances 
where service components were required to absorb these costs without 
additional resources. We recommended in our 2000 report that the 
Secretary of Defense take steps to ensure that the services increase 
funding for operation and maintenance accounts, as necessary, to fund 
the civilian and contractor personnel replacing military positions that 
have been transferred to meet other needs.[Footnote 35] The department 
acknowledged that this practice would require the services to program 
additional funding for operation and maintenance accounts, viewing this 
as a service investment decision. However, given the increased emphasis 
the department has placed on moving the military from commercial 
functions to warfare, officials from the Army and the Air Force have 
expressed concern that there were not adequate funds to replace the 
military with civilian or contractor personnel once their positions 
have been competed or transferred. This can have the effect of either 
limiting the number of conversions that can be made or requiring 
Defense components to absorb the costs within their existing budgets, 
creating limitations in other program areas.

As we have previously reported, selecting and grouping functions and 
positions to compete can also be difficult. Some functions may be 
spread across different geographic locations or may fulfill a roll that 
blurs the distinction between "commercial" and "inherently 
governmental," thus preventing the packaging of some commercial 
positions into suitable groups for competition. In addition, as 
previously noted, DOD excluded certain commercial functions in its FAIR 
Act inventories from competition. DOD's fiscal year 2002 FAIR Act 
inventory exempted 171,698 positions from competition because of 
statutory, national security, or operational concerns. Further, as we 
have previously reported, most services have already faced growing 
difficulties in finding enough study candidates to meet their A-76 
study goals.[Footnote 36] Finally, use of alternatives under the core-
competency approach could also limit positions available for 
A-76 study.

Conclusions:

Progress varies among DOD components in assessing core competencies and 
identifying and pursuing alternative sourcing strategies. Even so, some 
limitations have been identified which indicate that, contrary to some 
initial expectations, the determination of whether a function is core 
by itself will not automatically lead to a sourcing decision because, 
as the Army has discovered, other factors can also affect sourcing 
decisions. Clarification of the department's expectations for sourcing 
decisions is needed along with additional guidance on other factors 
that may need to be considered in sourcing decisions. Otherwise, the 
components may be left with unrealistic expectations on making sourcing 
decisions or they may make changes in sourcing that later prove to be 
problematic.

Under the core-competency process, the Air Force identified large 
numbers of military personnel who could be reassigned to meet other 
military requirements and be replaced by civilian or contractor 
personnel who may be a more economical alternative. However, to 
accomplish this reassignment, Air Force officials stated that it would 
need to find funds for replacement personnel out of operations and 
maintenance accounts. This is indicative of what other services are 
likely to face in seeking to accomplish such conversions--the need for 
additional funding in operations and maintenance accounts to support 
these conversions. Such conversions may be a more cost-effective 
alternative than simply increasing military end-strength where 
shortages exist in military positions. However, decisions to replace 
military personnel with civilians or contractors without identifying 
sources for increases in operations and maintenance funds to support 
those decisions could stress the ability of the operations and 
maintenance account to meet other pressing needs.

Recommendations:

We recommend that the Secretary of Defense, through the Senior 
Executive Council, clarify its expectations for DOD components in 
making sourcing decisions based on core competency assessment results 
and provide additional guidance identifying the range of additional 
factors to be considered once the determination is made that a function 
is not considered core.

We also recommend that the Secretary of Defense require DOD components 
to ensure that decisions to convert functions performed by military 
personnel to performance by civilians or contractors are predicated on 
having clearly identified sources of funding to support 
those decisions.

Agency Comments and Our Evaluation:

The Principal Assistant Deputy Under Secretary of Defense 
(Installations and Environment) provided written comments on a draft of 
this report. The department generally concurred with our 
recommendations. With respect to our first recommendation, the 
department agreed that, in addition to the determination of core 
competency, there are additional steps necessary to making effective 
sourcing decisions. However, the response did not indicate what 
specific guidance, if any, would be provided to clarify and assist the 
components in making sourcing determinations. Instead, the department 
suggested that core assessments would be used as input to the 
Inherently Governmental Commercial Activities Inventory and that the 
department's guidance on how to prepare these inventories will be 
continually refined to help the sourcing decision process. To the 
extent the department continues to emphasize core competency 
assessments and alternatives to A-76 competitions in making sourcing 
decisions, we still believe that additional guidance is needed to 
assist components on factors other than the designation of core or 
non-core that need to be considered when making a souring decision.

With respect to the second recommendation, the department agreed that 
the identification of adequate resources is a critical factor in 
meeting its competitive sourcing goals and, consequently, the response 
ensures that they will be properly funded. The department also provided 
a number of technical comments, which we incorporated into the report, 
where appropriate. The department's comments are reprinted in their 
entirety in appendix V.

Scope and Methodology:

As requested by the Ranking Minority Member of the House Committee on 
Armed Services, Subcommittee on Readiness, we reviewed DOD's plans for 
sourcing non-core functions and the effect this may have on its A-76 
program. Specifically, the objectives of this report were to assess 
(1) the department's progress in assessing its core functions as a 
basis for sourcing decisions, (2) the plans and progress DOD has made 
in identifying and implementing alternatives to A-76, and (3) the 
current status of DOD's A-76 program.

To evaluate the department's progress in assessing its core functions 
as a basis for sourcing decisions, we met with responsible officials 
from the Senior Executive Council, the Business Initiative Council, and 
the Office of the Secretary of Defense to identify plans and guidance 
for this initiative. We also met with officials from the Army, the Air 
Force, the Navy, the Marine Corps, and the Defense Logistics Agency to 
identify their implementation plans, guidance, and analyzed available 
data to assess progress being made. Our work was conducted in the 
Washington, D.C., metropolitan area.

To evaluate the plans and progress DOD has made in identifying and 
implementing alternatives to A-76, we met with officials in 
organizations identified above and obtained and analyzed relevant 
documentation pertaining to alternatives identified. Additionally, we 
spoke with representatives from the Defense Contract Management Agency 
and the Defense Finance and Accounting Service about their Pioneer 
projects.

Likewise, to assess the status of DOD's A-76 program, we met with 
cognizant officials within DOD and its key components to update 
information we had previously obtained in other recent studies in this 
area concerning studies planned and completed and we updated 
information we had previously obtained regarding challenges associated 
with this program. Data on the number of A-76 competitions used in this 
report were based on DOD's Commercial Activities Management Information 
System (CAMIS) Web-based system. Because the numbers change daily, what 
we reported are the precise figures in the database at the specified 
point in time. We have previously identified limitations in accuracy 
and completeness of data included in this system, which limit the 
precision of information included in the system. Since then, the 
department has made changes to improve the accuracy of data in the 
system, and the database remains the principal source of aggregate 
information on studies underway and completed. However, we did not 
audit the accuracy of the numbers in the database. We conducted our 
review from October 2002 to May 2003 in accordance with generally 
accepted government auditing standards.

We are sending copies of this report to the appropriate congressional 
committees; the Secretary of Defense; the Secretaries of the Army, 
the Navy, and the Air Force; the Commandant of the Marine Corps; and 
the Director, Office of Management and Budget. We will make copies 
available to others upon request. In addition, the report will be 
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have questions regarding this report, please 
contact me on (202) 512-8412 or holmanb@gao.gov. Other contacts and key 
contributors to this report are listed in appendix VI.

Sincerely yours,

Barry W. Holman, 
Director 
Defense Capabilities and Management:

Signed by Barry W. Holman: 

[End of section]

Appendix I: Alternatives to A-76 for Sourcing Non-Core Competencies:

In its April 2002 memo, the Senior Executive Council noted that "there 
are a number of imaginative alternatives to DOD ownership of Non-Core 
competencies." The memo provided detailed information on six specific 
alternatives--employee stock ownership plans, transitional benefit 
corporations, negotiation with private sector, city-base partnership, 
strategic partnering, and quasi-government corporations. Following is a 
description of the concept, an example of usage within the government, 
and recommended Internet sites for each alternative, based on the 
Senior Executive Council memo.

Employee Stock Ownership Plans (ESOP):

Concept: Mechanism used to spin off existing government activities to 
form an employee-owned company.

Description: The ESOP gives federal workers the ability to control 
their own destiny and obtain a stake in the successful outcome of a 
new business. ESOP is a contribution benefit plan that buys and holds 
company stock. Shares in the trust are allocated to individual employee 
accounts. While many privatizations result in layoffs and disruptions, 
ESOPs save jobs, retain critical skills, and provide seamless customer 
service to federal agencies.

Where Used Previously: U.S. Investigative Services (1995):

Internet Sites: http://www.nceo.org/esops/index.html and http://
americancapitalonline.com/datacenter/articleaspArticleID145.html:

Transitional Benefit Corporations (TBC):

Concept: Umbrella organization created to facilitate smooth transition 
of government employees.

Description: The TBC is designed to transition employees to the private 
sector while maintaining their federal benefits. Normally, a transition 
period is established where the government continues to pay for the 
benefits and then the new private company will eventually pay for those 
benefits back through the federal government. In addition, the TBC can 
contract with the private sector and partner with other governmental, 
private sector, educational or not-for-profit entities. It maintains 
core capabilities, preserves expertise of key personnel, finds a "soft 
landing" for underutilized workers, creates business environment for 
new growth, and provides a new business model for the government.

Where Used Previously: Department of Energy:

Internet Site: http://www.reedsmith.com/db30/cgi-bin/pubs/
a76costs.pdf:

Negotiation with Private Sector (i.e., transfer workforce to the 
private sector as part of a contract negotiation):

Concept: Negotiated transfer of government workforce to a private 
company.

Description: Negotiate with the private sector in the outsourcing of a 
government function to the private sector. However, the government 
negotiates to have the workers who performed the function be hired by 
the contractor. The goal is to get the employees comparable pay, at the 
same location (for an agreed upon minimum time period), and a matched 
retirement plan. It offers stability that a normal A-76 cost comparison 
study does not provide.

Where Used Previously: Army Logistics Data System Modernization with 
CSC Corporation:

Internet Sites: http://www.gcn.com/vol20 no6/news/3836-1.html and 
http://www.csc.com/newsandevents/news/720.shtml:

City-Base Partnership:

Concept: Transforming a military installation to city-owned property 
with military, public, non-profit, and commercial tenants occupying and 
leasing facilities.

Description: City Base is transforming a former military installation 
to city-owned property with military, public, non-profit, and 
commercial tenants occupying and leasing facilities. The service 
conveys the installation to the city and then leases back the 
facilities needed for mission operations. The city may contract with a 
third party to manage and develop the property.

Where Used Previously: Brooks Air Force Base and the City of San 
Antonio, Texas. The Air Force created the Brooks City-Base Partnership 
with the city of San Antonio as a means to reduce Air Force base 
operating and personnel cost and to promote public-public and public-
private partnerships. Special authorizing legislation in 1999 and 2000 
allowed such partnership in which the Air Force transferred real 
property to San Antonio in July 2002 in exchange for a leaseback of 
facilities and for the city to provide municipal services such as fire 
protection and law enforcement. Also, the Army has implemented a 
similar type of partnership with the city of Monterey, California.

Internet Site: http://www.ci.sat.tx.us/edd/brooks/citybasedef.htm:

Strategic Partnering:

Concept: Similar to negotiating with the private sector, this 
establishes a government-industry partnership and leverages the 
expertise of the commercial marketplace.

Description: Strategic partnering moves a function and employees away 
from the government. The function is not given to a private corporation 
but is "taken over" by the employees. However, the employees do not 
form a stand-alone corporation, but instead, a partnership with the 
private company. It is used when an organization has many of the 
necessary elements for operating as a private company, but does not 
have the complete framework necessary to operate as a stand-alone 
corporation (payroll, benefits programs, taxes, marketing, and business 
development). A strategic partnership allows the employees to partner 
with an entity that already has these systems and procedures in place. 
Such partnering arrangements could be made with a private firm, joint 
venture, or a non-profit organization.

Where Used Previously: National Security Agency (NSA)--CSC-led group 
with Logicon (Northrup Grumman) and dozens of "Alliance" contractors:

Internet Site: http://www.reedsmith.com/db30/cgi-bin/pubs/
a76costs.pdf:

Quasi-Government Corporations:

Concept: Publicly owned, common stock corporation, chartered by 
Congress and provided a marketplace niche in which to accomplish some 
public good. They can be monopolies (e.g., the U.S. Postal Service) or 
competitors (e.g., Fannie Mae and Freddie Mac).

Description: Quasi-government corporations are an alternative similar 
to the non-profit corporation. The principal difference is that it is 
established by a government agency in order to serve a governmental 
purpose, rather than being established by private individual firms. The 
employees are not federal civil servants and do not participate in the 
federal retirement or other federal employee benefit systems. The 
advantages are that they can operate more flexibly than a government 
agency and they are not required to comply with all of the federal 
personnel rules and acquisition regulations.

Where Used Previously: Fannie Mae, Freddie Mac:

Internet Sites: http://www.reedsmith.com/db30/cgi-bin/ pubs/
a76costs.pdf and http://www.auditor.leg.state.mn.us/fyi19a7.htm:

[End of section]

Appendix II: Army's Plans for Transforming Its In-House 
Industrial Facilities:

In 2002, the Army's "Third Wave" initiative received much public 
attention because of what Army officials have characterized as an 
unrelated, but parallel effort underway whereby RAND, under contract to 
the Army, was studying alternatives for rightsizing the Army's 
government-owned ammunition manufacturing facilities and two arsenals 
that manufacture ordnance materiel--facilities that overall had been 
recognized as having declining workloads, excess capacity, and high 
operating costs.

Although RAND had studied various options, such as privatization 
and creation of a federal government corporation, the Army decided 
in March 2003 not to pursue the options outlined in what was then a 
draft RAND report. Instead, in a March 24, 2003 memorandum to the 
Commanding General, U.S. Army Materiel Command (AMC), the Secretary of 
the Army directed the following actions to transform the Army owned 
portion of its defense industrial base to include ammunition 
facilities, manufacturing arsenals, and also its maintenance depots:

* AMC was directed to develop a written concept for 
consolidation, divestiture, or leasing, as appropriate, of the 
government-owned/government-operated and government-owned/contractor-
operated ammunition facilities.

* AMC was directed to continue to work towards reducing government-
owned and operated manufacturing arsenal plant capacity and develop 
internal efficiency measures for facilities responsible for ground-
based systems.

* AMC was directed to use existing legal authority to form and maintain 
partnerships between government-owned and operated maintenance depots 
and the private sector, and implement initiatives to improve 
efficiencies, optimize utilization, and upgrade the core capabilities 
required to meet current and future requirements.

[End of section]

Appendix III: Senior Executive Council Definitions of Core Competency:

In attempting to define core competency in a defense environment, the 
Senior Executive Council defined core as "A complex harmonization of 
individual technologies and 'production' (employment, delivery) skills 
that create unique military capabilities valued by the force employing 
CINC!" The Council provided the following additional definitions to 
help in the understanding of core:

* Proficiency in the coordination of human activity and employment of 
technology and technical systems to conduct military operations called 
for by a CINC.

* A complex integration of human knowledge and skills with the 
technologies of warfare to accomplish a military objective of value to 
a commander.

* It's what we do better than anyone else to produce specific effects 
desired by a CINC.

* The essence of what we provide in world-class warfighting and related 
unique capabilities--through a synergistic combination of knowledge, 
technologies, and people--to produce desired effects for CINCs.

* The deep commitment of people, using technologies and delivering 
capabilities to meet a desired effect in support of national 
objectives.

* A synergistic employment of individual and organizational knowledge, 
technologies, and capabilities producing world-class services 
(military operations) to deliver a desired effect to a CINC.

[End of section]

Appendix IV: Pioneer Projects:

In support of the Senior Executive and Business Initiative Councils' 
direction to identify alternative approaches to A-76 for selected non-
core competencies, the services and Defense agencies identified 10 
pilot "pioneer" projects. All 10 were approved by the Business 
Initiative Council and presented to the Office of Management and 
Budget. Eight of the projects were approved by OMB to be counted toward 
DOD's FAIR Act inventory goal. OMB endorsed the pioneer projects whose 
techniques were waivers to A-76, new requirements, direct service 
contract, and divestiture, but disapproved the projects that proposed 
reengineering as their technique. Subsequently, DOD withdrew 2 
projects, leaving 6 pilot projects for implementation. A brief 
description of those projects and their current status is provided 
below.

Department of the Navy: Ophthalmic Services:

Description: Optical fabrication involves eyewear component production 
and assembly and is performed at about 37 locations within and outside 
of the United States, employing personnel in the Departments of the 
Navy and Army. The Department of the Navy has the lead responsibility 
for this pioneer project and is now starting its analysis of this 
divestiture proposal. It anticipates that the analysis will take 
approximately 6 to 18 months to complete. A final decision regarding 
the optical fabrication divestiture will be made after the completion 
of the analysis.

Alternative: Divestiture:

Positions Affected: Approximately 69 civilians and 300 military:

Status: Conceptual Stage:

Department of the Air Force: Brooks City-Base:

Description: The Brooks City-Base Partnership involves a partnership 
between the Air Force and the city of San Antonio for which the 
Congress passed special authorizing legislation in 1999 and 2000. This 
divestiture was a way to reduce Air Force base operating and personnel 
cost and build public-public and public-private partnerships. As part 
of this effort, the Air Force transferred Brooks Air Force Base's real 
property to San Antonio in July 2002 in exchange for a leaseback of 
facilities and for the city to provide municipal services such as fire 
protection, law enforcement, custodial and landscaping. Also, as part 
of this partnering arrangement, the city of San Antonio will provide 
the Air Force a share of the revenues generated from the contracts and 
developments resulting from the land and facilities transferred.

Alternative: Divestiture:

Positions Affected: Approximately 100 civilian and 40 military:

Status: Ongoing.

Department of the Army: Municipal Services Partnership for Base 
Support:

Description: According to its current arrangement with the city of 
Monterey, California, the Department of the Army proposed the Municipal 
Services Partnership for Base Support as its pioneer project. The Army 
is seeking legislative authority for all components within the 
department to be able to contract directly with local governments for 
municipal services such as public works and utility.

Alternative: Direct Service Contract:

Positions Affected: Approximately 500 civilian employees (depending 
upon the number of installations selected for this type of contract).

Status: Enabling legislation has been submitted to Congress for 
consideration as part of the fiscal year 2004 authorization process.

The Army is conducting business case analyses for additional 
installation selection in the event the legislation is approved. 
However, as of May 2003, this proposal was not included in either the 
House or Senate approved versions of the bill.

Defense Logistics Agency: Metalworking Machinery Repair/Rebuild 
Services:

Description: The Defense Logistics Agency (DLA) is proposing that 
the repair and rebuilding of depot-level industrial plant equipment by 
in-house personnel at the Defense Supply Center Richmond's facility in 
Mechanicsburg, Pennsylvania, be subject to direct conversion through 
an A-76 waiver in accordance with the Office of Management and 
Budget Circular A-76's Revised Supplement Handbook, part I, chapter I, 
section E.

Alternative: Waiver to A-76 Full Cost Comparison Study:

Positions Affected: Approximately 82 civilians:

Status: DOD assessed the applicability of OMB Circular A-76 to this 
function and determined that the Mechanicsburg facility is a depot 
level maintenance and repair operation and is therefore exempt from OMB 
Circular A-76.

Defense Contract Management Agency: Reengineer Existing Information 
Technology Structure:

Description: The Defense Contract Management Agency plans to use a 
streamlined A-76 approach to compete information technology functions 
such as desk side support, district offices' information technology 
operations, and automated application testing. The streamlined A-76 
approach will allow the Defense Contract Management Agency to directly 
compare its costs for these types of functions with those of 
contractors on the General Services Administration's schedules. Also, 
it will shorten the time for completing the A-76 process.

Alternative: Streamlined A-76:

Positions Affected: 450 positions reviewed, approximately 250 positions 
affected:

Status: Streamlined A-76 effort is scheduled to start January 2004 with 
anticipated implementation of the most efficient organization and/or 
contracts by fiscal year 2005.

Defense Finance and Accounting Service: Desktop Management Services:

Description: The Defense Finance and Accounting Service (DFAS) is 
proposing to acquire computer management services from a commercial 
source. As part of this effort, DFAS plans to use a performance-based 
service contract to obtain desktop hardware, software, and support 
services.

Alternative: New Requirement:

Positions Affected: Approximately 125 civilians:

Status: DFAS notified Congress of this proposal and its plans to assess 
desktop management services. DFAS has completed its desktop management 
business case assessment and its announcement regarding that decision 
is imminent.

[End of section]

Appendix V: Comments from the Department of Defense:

OFFICE OF THE UNDER SECRETARY OF DEFENSE:

3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:

ACQUISITION, TECHNOLOGY AND LOGISTICS:

JUL 09 2003:

Mr. Barry W. Holman:

Director, Defense Capabilities and Management U.S. General Accounting 
Office:

Washington, DC 20548:

Dear Mr. Holman:

This is the Department of Defense (DoD) response to the GAO final 
report, GAO-03-818, "DEFENSE MANAGEMENT: DoD Faces Challenges 
Implementing Its Core Competency Approach and A-76 Competitions," dated 
May 30, 2003 (GAO Code-350292). A detailed response is enclosed.

Sincerely,

Philip W. Grone 
Principal Assistant Deputy Under Secretary of Defense 
(Installations and Environment):

Signed by Philip W. Grone: 

Enclosure:

GAO-03-818/GAO CODE 350292:

"DEFENSE MANAGEMENT: DOD FACES CHALLENGES IN IMPLEMENTING ITS CORE 
COMPETENCY APPROACH AND A-76 COMPETITIONS":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense, 
through the Senior Executive Council, clarify its expectations for DoD 
Components in making sourcing decisions based on core assessments and 
provide additional guidance identifying the range of additional factors 
to be considered once the determination is made that a function is not 
considered core. (Page 32/Draft Report):

DoD RESPONSE:

The Department recognizes that determination of core competencies is a 
meaningful step in the strategic planning process for achieving 
business efficiencies. However, as the report notes, there are 
additional steps to take to make effective sourcing decisions. The 
revised OMB Circular A-76 designates responsibility for determining 
availability of functions for competition to the DoD Competitive 
Sourcing Official. We expect core competency results to inform but not 
determine such coding. The Inherently Governmental Commercial 
Activities Inventory guidance is provided each November and has 
undergone considerable refinement. The dynamic nature of the sourcing 
decision process will require continued refinement in this year's 
guidance.

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
require DoD Components to ensure that decisions to convert functions 
performed by military personnel to performance by civilians or 
contractors are predicted on having clearly identified sources of 
funding to support those decisions. (Page 32/Draft Report):

DoD RESPONSE:

We agree that identification of adequate resources is a critical factor 
in meeting the Department's target for the President's Management 
Agenda for Competitive Sourcing. We will ensure that these plans are 
properly funded.

[End of section]

Appendix VI: GAO Contact and Staff Acknowledgments:

GAO Contact:

Marilyn K. Wasleski (202) 512-8436:

Acknowledgments:

In addition to the names above, Debra McKinney, Nancy Lively, R.K. 
Wild, Daniel Kostecka, and Kenneth Patton also made significant 
contributions to this report.

[End of section]

Related GAO Products:

Sourcing and Acquisition: Challenges Facing the Department of Defense. 
GAO-03-574T. Washington, D.C.: March 19, 2003.

Proposed Revisions to OMB Circular A-76. GAO-03-391R. Washington, D.C.: 
January 16, 2003.

Defense Management: New Management Reform Program Still Evolving. GAO-
03-58. Washington, D.C.: December 12, 2002.

Commercial Activities Panel: Improving the Sourcing Decisions of the 
Federal Government. GAO-02-847T. Washington, D.C.: September 27, 2002.

Commercial Activities Panel: Improving the Sourcing Decisions of the 
Federal Government. GAO-02-866T. Washington, D.C.: June 26, 2002.

Competitive Sourcing: Challenges in Expanding A-76 Governmentwide. GAO-
02-498T. Washington, D.C.: March 6, 2002.

DOD Competitive Sourcing: A-76 Program Has Been Augmented by Broader 
Reinvention Options. GAO-01-907T. Washington, D.C.: June 28, 2001.

DOD Competitive Sourcing: Effects of A-76 Studies on Federal Employees' 
Employment, Pay, and Benefits Vary. GAO-01-388. Washington, D.C.: March 
16, 2001.

DOD Competitive Sourcing: Results of A-76 Studies Over the Past 
5 Years. GAO-01-20. Washington, D.C.: December 7, 2000.

DOD Competitive Sourcing: More Consistency Needed in 
Identifying Commercial Activities. GAO/NSIAD-00-198. Washington, D.C.: 
August 11, 2000.

DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed 
to Improve Accuracy of Savings Estimates. GAO/NSIAD-00-107. Washington, 
D.C.: August 8, 2000.

DOD Competitive Sourcing: Some Progress, but Continuing 
Challenges Remain in Meeting Program Goals. GAO/NSIAD-00-106. 
Washington, D.C.: August 8, 2000.

Competitive Contracting: The Understandability of FAIR Act Inventories 
Was Limited. GAO/GGD-00-68. Washington, D.C.: April 14, 2000.

DOD Competitive Sourcing: Potential Impact on Emergency 
Response Operations at Chemical Storage Facilities Is Minimal. GAO/
NSIAD-00-88. Washington, D.C.: March 28, 2000.

DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army 
Logistics Modernization Program. GAO/NSIAD-00-19. Washington, D.C.: 
October 4, 1999.

DOD Competitive Sourcing: Air Force Reserve Command A-76 Competitions. 
GAO/NSIAD-99-235R. Washington, D.C.: September 13, 1999.

DOD Competitive Sourcing: Lessons Learned System Could Enhance A-76 
Study Process. GAO/NSIAD-99-152. Washington, D.C.: July 21, 1999.

Defense Reform Initiative: Organization, Status, and Challenges. GAO/
NSIAD-99-87. Washington, D.C.: April 21, 1999.

Quadrennial Defense Review: Status of Efforts to Implement Personnel 
Reductions in the Army Materiel Command. GAO/NSIAD-99-123. Washington, 
D.C.: March 31, 1999.

Defense Reform Initiative: Progress, Opportunities, and Challenges. 
GAO/T-NSIAD-99-95. Washington, D.C.: March. 2, 1999.

Force Structure: A-76 Not Applicable to Air Force 38th Engineering 
Installation Wing Plan. GAO/NSIAD-99-73. Washington, D.C.: 
February 26, 1999.

Future Years Defense Program: How Savings From Reform Initiatives 
Affect DOD's 1999-2003 Program. GAO/NSIAD-99-66. Washington, D.C.: 
February 25, 1999.

DOD Competitive Sourcing: Results of Recent Competitions. GAO/NSIAD-99-
44. Washington, D.C.: February 23, 1999.

DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key 
Reform Initiative. GAO/NSIAD-99-46. Washington, D.C.: February 22, 
1999.

OMB Circular A-76: Oversight and Implementation Issues. GAO/T-GGD-98-
146. Washington, D.C.: June 4, 1998.

Quadrennial Defense Review: Some Personnel Cuts and Associated Savings 
May Not Be Achieved. GAO/NSIAD-98-100. Washington, D.C.: April 30, 
1998.

Competitive Contracting: Information Related to the Redrafts of the 
Freedom From Government Competition Act. GAO/GGD/NSIAD-98-167R. 
Washington, D.C.: April 27, 1998.

Defense Outsourcing: Impact on Navy Sea-Shore Rotations. GAO/NSIAD-98-
107. Washington, D.C.: April 21, 1998.

Defense Infrastructure: Challenges Facing DOD in Implementing Defense 
Reform Initiatives. GAO/T-NSIAD-98-115. Washington, D.C.: March 18, 
1998.

Defense Management: Challenges Facing DOD in Implementing 
Defense Reform Initiatives. GAO/T-NSIAD/AIMD-98-122. Washington, D.C.: 
March 13, 1998.

Base Operations: DOD's Use of Single Contracts for Multiple Support 
Services. GAO/NSIAD-98-82. Washington, D.C.: February 27, 1998.

Defense Outsourcing: Better Data Needed to Support Overhead Rates for 
A-76 Studies. GAO/NSIAD-98-62. Washington, D.C.: February 27, 1998.

Outsourcing DOD Logistics: Savings Achievable But Defense Science 
Board's Projections Are Overstated. GAO/NSIAD-98-48. Washington, D.C.: 
December 8, 1997.

Financial Management: Outsourcing of Finance and Accounting Functions. 
GAO/AIMD/NSIAD-98-43. Washington, D.C.: October 17, 1997.

Base Operations: Contracting for Firefighters and Security Guards. GAO/
NSIAD-97-200BR. Washington, D.C.: September 12, 1997.

Terms Related to Privatization Activities and Processes. GAO/
GGD-97-121. Washington, D.C.: July 1, 1997.

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save 
Billions in Infrastructure Costs. GAO/T-NSIAD-97-110. 
Washington, D.C.: March 12, 1997.

Base Operations: Challenges Confronting DOD as It Renews Emphasis on 
Outsourcing. GAO/NSIAD-97-86. Washington, D.C.: March 11, 1997.


FOOTNOTES

[1] Throughout this report, we use the terms "activities" and 
"functions" interchangeably.

[2] The Senior Executive Council is a high-level management committee 
established in 2001 to (1) help guide efforts across the department to 
transform and improve the department's business practices, and (2) to 
function as a board of directors for DOD. The Council is chaired by the 
Secretary of Defense and is comprised of the Deputy Secretary of 
Defense, the service secretaries, and the Under Secretary of Defense 
for Acquisition, Technology and Logistics.

[3] Executive Office of the President, Office of Management and Budget, 
The President's Management Agenda, Fiscal Year 2002. The report can be 
found at www.whitehouse.gov/omb/budget. The President's Management 
Agenda, announced in the summer of 2001, is a strategy for improving 
the management of the federal government. It focuses on five areas of 
management weakness across the government where improvements and the 
most progress can be made. In addition to competitive sourcing, the 
President's Management Agenda includes an emphasis on strategic 
management of human capital, improved financial performance, expanded 
electronic government, and budget and performance integration.

[4] Defense components refer to the military services and Defense 
agencies.

[5] Officially referred to as pioneer projects.

[6] This goal is based on DOD's inventory of commercial activities 
reported in 2000; the numbers vary by year.

[7] The costs of military positions are funded through military 
personnel appropriation accounts, whereas costs associated with 
government civilian or contractor personnel are funded through 
operation and maintenance appropriation accounts.

[8] The Panel, mandated by section 832 of the Defense Authorization Act 
for fiscal year 2001, required the Comptroller General to convene a 
panel of experts to study the process used by the federal government to 
make sourcing decisions. After a yearlong study, the Panel published 
its report in April 2002. See Commercial Activities Panel, Improving 
the Sourcing Decisions of the Government: Final Report, (Washington, 
D.C.: Apr. 30, 2002). The report can be found on GAO's Web site at 
http://www.gao.gov under the Commercial Activities Panel heading.

[9] The current revision to the circular replaces the use of direct 
conversion with a requirement to compete all non inherently 
governmental functions. In addition, the revised circular provides for 
a streamlined cost comparison for 65 or fewer civilian positions in 
addition to standard competitions.

[10] DOD has submitted a legislative proposal for inclusion in the 
National Defense Authorization Bill for Fiscal Year 2004, a request to 
eliminate the existing requirement that the department base its 
competitive sourcing decisions on cost. This would allow DOD to 
consider quality as well as cost when making sourcing decisions.

[11] OMB Circular A-76 defines an inherently governmental function as 
one that requires either the exercise of substantial discretion in 
applying government authority or the making of value judgments in 
making decisions for the government. Positions deemed inherently 
governmental are not subject to the A-76 program.

[12] Section 5 of P.L. 105-270, 31 U.S.C. 501 note (1998), on the other 
hand, defines an inherently governmental function as a "function that 
is so intimately related to the public interest as to require 
performance by Federal Government employees."

[13] As noted in subsequent discussion, the terms are not always 
interchangeable.

[14] U.S. Department of Defense, Quadrennial Defense Review Report 
(Sept. 30, 2001).

[15] The Senior Executive Council is a high-level management committee 
established in 2001 to (1) help guide efforts across the department to 
transform and improve the department's business practices, and (2) to 
function as a board of directors for DOD. The Council is chaired by the 
Secretary of Defense and is comprised of the Deputy Secretary of 
Defense, the service secretaries, and the Under Secretary of Defense 
for Acquisition, Technology and Logistics.

[16] William M. Hix et al., Rethinking Governance of the Army's 
Arsenals and Ammunition Plants, RAND (Santa Monica, Calif., 2003).

[17] C.K. Prahalad and Gary Hamel, "The Core Competence of the 
Corporation," Harvard Business Review, May-June 1990.

[18] For example, the Army used its Field Manual No. 1, The Army, to 
provide additional guidance. The Army describes this as its capstone 
doctrinal manual, which, among other things, delineates the Army's 
purpose, roles, and functions.

[19] Force management risk includes the ability to recruit, retain, 
train, and equip sufficient numbers of quality personnel and sustain 
the readiness of the force while accomplishing its many operations 
tasks. Operational risk concerns the ability to achieve military 
objectives in a near-term conflict or other contingency. Future 
challenges risk involves the ability to invest in new capabilities and 
develop new operational concepts needed to dissuade or defeat mid-to 
long-term military challenges. Institutional risk entails the ability 
to develop management practices and controls that use resources 
efficiently and promote the effective operation of the Defense 
establishment.

[20] See U.S. General Accounting Office, Base Operations: Challenges 
Confronting DOD as It Renews Emphasis on Outsourcing, GAO/NSIAD-97-86 
(Washington, D.C.: Mar. 11, 1997); DOD Force Mix Issues: Converting 
Some Support Officer Positions to Civilian Status Could Save Money, 
GAO/NSIAD-97-15 (Washington, D.C.: Oct. 23, 1996); and DOD Force Mix 
Issues: Greater Reliance on Civilians in Support Roles Could Provide 
Significant Benefits, GAO/NSIAD-95-5 (Washington, D.C.: 
Oct. 19, 1994.)

[21] Military positions are funded out of the Military Personnel 
Appropriation accounts. With military personnel being shifted to other 
positions, this does not free up funds that could be used to increase 
funding for replacement personnel in the Operations and Maintenance 
Appropriation accounts.

[22] The Business Initiative Council, an organization that reports 
directly to the Senior Executive Council, was established in 2001 to 
encourage the military services to explore new money-saving business 
practices to help offset funding requirements for transformation and 
other high-priority efforts. It is headed by the Under Secretary of 
Defense for Acquisition, Technology and Logistics, and its membership 
consists of the service secretaries, the Vice Chairman of the Joint 
Chiefs of Staff, the Under Secretary of Defense (Comptroller), and the 
Under Secretary of Defense for Personnel and Readiness.

[23] This legislative request was included as part of the department's 
request for legislation submitted to Congress for consideration as part 
of the fiscal year 2004 Defense Authorization bill. As of May 2003, 
this proposal was not included in either the House or Senate approved 
versions of the bill.

[24] U.S. General Accounting Office, Proposed Revisions to OMB Circular 
A-76, GAO-03-391R (Washington, D.C.: Jan. 16, 2003).

[25] This prison houses level III prisoners from each of the military 
services. This level has been defined as those prisoners with a 
sentence of 7 years or more.

[26] Section 2461 requires, among other things, that before any 
commercial or industrial type function that as of October 1, 1980, was 
being performed by DOD civilian employees is changed to private sector 
performance, DOD must report to the Congress, conduct an analysis 
showing that private-sector performance will result in a savings to the 
government over the life of the contract, and certify that the analysis 
is available for examination.

[27] This provision requires that DOD certify its most efficient and 
cost-effective organization analysis to congressional committees 
before converting any activity performed by more than 10 DOD civilian 
employees to contractor performance.

[28] 10 U.S.C. § 858 (Sentences of confinement adjudged by a court-
martial may be carried into execution in any facility under control of 
the United States). 10 U.S.C. § 951 (The military may but is not 
required to provide for the establishment of correctional facilities).

[29] Also included in the Defense Transformation for the 21st Century 
Act of 2003. Generally, 10 U.S.C. § 2465 prohibits DOD from contracting 
for firefighters and security guards except when (1) the contract is to 
be performed overseas, (2) when the contract is to be performed on 
government-owned but privately operated installations, or (3) when the 
contract (or renewal of the contract) is for the performance of a 
function already under contract as of September 24, 1983. In addition, 
there is temporary exception for contracts for security services with 
local governments with respect to closing bases.

[30] We have previously reported that the best way to determine if 
savings can be achieved from contracting firefighter and security guard 
services is by completing an A-76 study at each base where these 
services are being considered for conversion to contract. See 
U.S. General Accounting Office, Base Operations: Contracting for 
Firefighters and Security Guards, GAO/NSIAD-97-200BR (Washington, 
D.C.: Sept. 12, 1997).

[31] As of June 1, 2003, DOD reported that it has met OMB's 15-percent 
goal. 

[32] U.S. General Accounting Office, DOD Competitive Sourcing: Some 
Progress, but Continuing Challenges Remain in Meeting Program Goals, 
GAO/NSIAD-00-106 (Washington, D.C.: Aug. 8, 2000); and DOD Competitive 
Sourcing: Questions About Goals, Pace, and Risk of Key Reform 
Initiatives, GAO/NSIAD-99-46 (Washington, D.C.: Feb. 22, 1999).

[33] Streamlined competitions allow for an abbreviated source selection 
for 65 or fewer civilian positions and/or any number of military 
personnel. Streamlined competitions are to be completed within 90 days, 
with a possible extension of no more than 45 days.

[34] GAO/NSIAD-00-106.

[35] GAO/NSIAD-00-106.

[36] GAO/NSIAD-00-106.

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