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Report to Congressional Requesters:

United States General Accounting Office:

GAO:

February 2004:

Competitive Sourcing:

Greater Emphasis Needed on Increasing Efficiency and Improving 
Performance:

GAO-04-367:

GAO Highlights:

Highlights of GAO-04-367, a report to the Honorable Robert C. Byrd, 
the Honorable Susan M. Collins, the Honorable George V. Voinovich, and 
the Honorable Henry A. Waxman 

Why GAO Did This Study:

In August 2001, the administration announced competitive sourcing as 
one of five initiatives in the President’s Management Agenda. Under 
competitive sourcing, federal agencies open their commercial 
activities to competition among public and private sector sources. 
While competitive sourcing is expected to encourage innovation and 
improve efficiency and performance, it represents a major management 
change for most agencies.

This report describes the progress selected agencies have made in 
establishing a competitive sourcing program, identifies major 
challenges these agencies are facing, and discusses strategies they 
are using to select activities for competition.

What GAO Found:

Since the President announced competitive sourcing as a governmentwide 
initiative, the six civilian agencies GAO reviewed created a basic 
infrastructure for their competitive sourcing programs, including 
establishing offices, appointing officials, hiring staff and 
consultants, issuing guidance, and conducting training. With 
infrastructures in place and leadership involvement, each agency has 
developed competitive sourcing plans and conducted some competitions. 
The Department of Defense (DOD) has had an extensive competitive 
sourcing program since the mid-1990s. Interagency forums for sharing 
competitive sourcing information also have been established.

While such activities are underway, each agency GAO reviewed, 
including DOD, cited several significant challenges in achieving its 
competitive sourcing goals. Key among these is maintaining workforce 
inventories that distinguish inherently governmental positions from 
commercial positions—a prerequisite to identifying potential positions 
to compete. Agencies also have been challenged to develop competitive 
sourcing approaches that would improve efficiency, in part because 
agencies have focused more on following OMB guidance on the number of 
positions to compete—not on achieving savings and improving 
performance. Ensuring adequate personnel with the skills needed to run 
a competitive sourcing program also challenged agencies. Many civilian 
department-level offices have only one or two full-time staff to 
interpret new laws, implement new OMB guidance, maintain inventories 
of competable positions and activities, and oversee agency 
competitions. The Federal Acquisition Council is currently identifying 
agency staffing needs to address this challenge. Finally, some of the 
civilian agencies we reviewed reported funding challenges in 
implementing their competitive sourcing programs. OMB told agencies to 
include a line item for competitive sourcing activities in their 
fiscal year 2005 budget requests.

Several agencies integrated their strategic, human capital, and 
competitive sourcing plans—an approach encouraged by the Commercial 
Activities Panel, which was convened to conduct a congressionally 
mandated study of the competitive sourcing process. For example, the 
Internal Revenue Service (IRS) used business case analyses to assess 
the economic benefits of various sourcing alternatives. An IRS 
official said this approach required minimal investment to determine 
an activity’s suitability for competitive sourcing. The National 
Institutes of Health, the Army, and the Department of Education also 
took a strategic approach to competitive sourcing.

OMB’s task in balancing the need for transparency and consistency with 
the flexibility agencies need is not an easy one. While OMB is 
addressing funding and human capital challenges, it needs to do more 
to assure that the agencies’ inventories of commercial positions and 
goal-setting processes are more strategic and helpful to agencies in 
achieving savings and improving performance.

What GAO Recommends:

GAO is making three recommendations to the Office of Management and 
Budget (OMB) to help agencies (1) ensure greater consistency in 
classifying positions as either inherently governmental or commercial, 
(2) identify functional areas for competition, and (3) focus 
competition plans more on desired outcomes.

OMB concurred with our recommendations, but disagreed with the 
conclusion that its recent guidance emphasizes process more than 
results. The seven agencies GAO reviewed either agreed with the 
report, had no comments, or offered only technical revisions.

www.gao.gov/cgi-bin/getrpt?GAO-04-367.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact William Woods at 
(202) 512-8214 or woodsw@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Agencies Have Established a Foundation for Their Competitive Sourcing 
Programs:

Many Agencies Face Challenges in Implementing Competitive Sourcing:

Some Agencies Used Strategic Approach to Identify and Prioritize 
Activities for Competition:

Conclusion:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Appendix II: Guiding Principles for Competitive Sourcing:

Appendix III: 2002 FAIR Act Inventories:

Appendix IV: Competitive Sourcing Studies Initiated and Completed in 
2002 and 2003:

Appendix V: Disposition of Competable Commercial FTEs Where Studies 
Completed:

Appendix VI: Evolution of OMB's FAIR Act Guidance:

Appendix VII: OMB Scorecard Criteria for the Competitive 
Sourcing Initiative:

Appendix VIII: Strategic Approaches to Competitive Sourcing:

Appendix IX: Comments from the Department of Health & Human Services:

Appendix X: Comments from the Department of the Interior:

Appendix XI: Comments from the Department of Veterans Affairs:

Tables:

Table 1: Overview of Civilian Agency Infrastructure Development:

Table 2: Timeline of Selected Competitive Sourcing Initiative Events:

Table 3: Disposition of 2002 Competable Commercial FTEs Where Studies 
Have Been Completed:

Table 4: Disposition of 2003 Competable Commercial FTEs Where Studies 
Have Been Completed:

Figure:

Figure 1: Major Competitive Sourcing Phases and Related Tasks:

Abbreviations:

FAIR: Federal Activities Inventory Reform Act of 1998:

FTE: full-time equivalent:

HHS: Health and Human Services:

MEO: most efficient organization:

OMB: Office of Management and Budget:

VA: Veterans Affairs:

United States General Accounting Office:

Washington, DC 20548:

February 27, 2004:

The Honorable Robert C. Byrd: 
Ranking Minority Member: 
Committee on Appropriations: 
United States Senate:

The Honorable Susan M. Collins: 
Chairman: 
Committee on Governmental Affairs: 
United States Senate:

The Honorable George V. Voinovich: 
Chairman: 
Subcommittee on Oversight of Government Management, the Federal 
Workforce and the District of Columbia: 
Committee on Governmental Affairs: 
United States Senate:

The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives:

The environment in which the federal government currently operates--
with new security threats, demographic changes, rapidly evolving 
technologies, increased pressure for results, and growing fiscal 
imbalances--demands that agencies engage in a fundamental review of how 
they accomplish their missions. Agencies increasingly rely on a 
range of technical and support services to meet mission objectives. It 
is important for agencies to decide how best to acquire and deliver 
such services, including whether to obtain services in-house or through 
private sources. One way to inform this decision is to use competitive 
sourcing, a strategy under which agencies open the government's 
commercial activities to competition among public and private sector 
sources.

In 2001, the administration identified competitive sourcing as one of 
five governmentwide initiatives in the President's Management 
Agenda.[Footnote 1] This initiative seeks to expand competition between 
the public and private sectors to encourage innovation, increase 
efficiency, and to improve performance. But the use of public-private 
competition represents a major management change for agencies and has 
raised concerns about the fairness of the process and the potential 
impact on federal jobs. Therefore, after discussions with your staff, 
we agreed to (1) describe the progress agencies have made in 
establishing a competitive sourcing program in response to the 
President's Management Agenda, (2) identify major challenges agencies 
are facing, and (3) identify strategies they are using to select 
activities for competition based on mission-related needs.

Our work focused on the initial implementation efforts of the following 
seven departments and the agencies within those departments that have 
the most developed competitive sourcing programs: Agriculture; Defense; 
Education; Health and Human Services (HHS); the Interior; the Treasury; 
and Veterans Affairs (VA). Together, these departments account for 
about 84 percent of the commercial positions among the 26 executive 
branch agencies implementing the President's Management Agenda. For 
more on our scope and methodology, see appendix I.

Results in Brief:

Each of the agencies we reviewed has laid the foundation for its 
competitive sourcing program. The Department of Defense (DOD) has had 
an extensive competitive sourcing program in place since the mid-1990s, 
and all of the civilian agencies we reviewed have created a basic 
infrastructure for their competitive sourcing programs since the 
President announced competitive sourcing as a governmentwide initiative 
in August 2001. In creating these infrastructures, agencies have 
established offices, appointed officials, hired staff and consulting 
contractors, issued guidance, and conducted training. With 
infrastructures in place and leadership involvement, each agency--
defense and civilian--has developed competitive sourcing plans and 
conducted some competitions. At least two interagency forums for 
sharing competitive sourcing information also have been established.

Although agencies have made progress, they cited several challenges in 
implementing their competitive sourcing programs. Key among these 
challenges is developing workforce inventories that identify commercial 
and inherently governmental full-time equivalent (FTE) 
positions.[Footnote 2] Agencies reported difficulty in classifying 
positions as inherently governmental or commercial and in applying 
guidance to categorize activities, making it challenging for agencies 
to identify potential candidates for competitions. While recent Office 
of Management and Budget (OMB) guidance has stressed that agencies 
should tailor their plans to meet mission needs, the emphasis in the 
guidance is still more on process than results. Agencies have focused 
on meeting targets to announce and complete competitions and have not 
assessed broader issues, such as weighing potential improvements 
against the costs and risks associated with performing the 
competitions.

Agencies also have been challenged to ensure they have adequate 
personnel with the skills needed to run a competitive sourcing program. 
Although DOD has a well-established management structure, many civilian 
department-level offices have only one or two full-time staff members 
to interpret new laws, implement new guidance issued by OMB, maintain 
inventories of competable positions and activities, and oversee agency 
competitions. According to a cognizant Army official, implementation of 
OMB's revised guidance for competitions will require approximately 100 
to 150 additional personnel in the Army alone, including attorneys, 
human capital specialists, and contracting officials. Some of the 
civilian agencies we reviewed also reported funding challenges 
associated with implementing their competitive sourcing programs.

Despite these challenges, several agencies have developed strategic and 
transparent competitive sourcing approaches by integrating their 
strategic and human capital plans with their competitive sourcing 
plans. The Commercial Activities Panel, which was convened to conduct a 
congressionally mandated study of the government's competitive sourcing 
process, supported use of this approach. Through broader functional 
assessments and comprehensive analyses that include factors such as 
potential savings, risks, current level of efficiency, market 
conditions, and current and projected workforce profiles, these 
agencies are identifying viable activities for competition.

We are making several recommendations to OMB to help agencies 
(1) ensure greater consistency in classifying positions as inherently 
governmental or commercial, (2) make more strategic and transparent 
sourcing decisions by identifying broader functional areas for 
competition, and (3) focus on efficiency and performance outcomes. We 
provided a draft of this report to OMB and the seven agencies for their 
review and comment. OMB concurred with our three recommendations, but 
disagreed with our conclusion that its recent guidance emphasizes 
process more than results. The Department of Agriculture and the 
Department of the Interior concurred with the report. The Department of 
the Treasury said the recommendations were timely and the remaining 
agencies either had no comments or offered only technical revisions.

Background:

Since 1955, the executive branch has encouraged federal agencies to 
obtain commercially available goods and services from the private 
sector when the agency determines that it is cost-effective. In 1966, 
OMB formalized this policy in its Circular A-76 and, in 1979, issued a 
handbook with procedures for determining whether commercial activities 
should be performed in-house, by another federal agency, or by the 
private sector.[Footnote 3]

Administrative and legislative constraints from the late 1980s through 
1995 resulted in a lull in awarding contracts under A-76 competitions. 
In 1995, when congressional and administration initiatives placed 
greater emphasis on public-private competitions to achieve economies 
and efficiency of operations, DOD gave competitive sourcing renewed 
emphasis. In our past work, we have found that DOD achieved savings 
through competitive sourcing, although it is difficult to estimate 
precisely the amount of savings.[Footnote 4] By including competitive 
sourcing as one of five governmentwide initiatives announced in August 
2001, the administration directed agencies to implement competitive 
sourcing programs to achieve increased savings and to improve 
performance. The administration continues to advocate the use of 
competitive sourcing, which is addressed in the President's budget for 
fiscal year 2005.

Competitive sourcing has met with considerable controversy in both the 
public and private sectors. Each sector expressed concerned that, in 
general, the process was unfair and did not provide for holding the 
winner of the competition accountable for performance. In response to 
this controversy, in 2000, the Congress mandated a study of the 
government's competitive sourcing process under A-76[Footnote 5]--a 
study conducted by the Commercial Activities Panel, chaired by the 
Comptroller General of the United States. The panel included 
representatives from OMB, DOD, the Office of Personnel Management, 
private industry, academia, a trade association, and unions. In April 
2002, the panel released its report[Footnote 6] with recommendations 
that included 10 sourcing principles to provide a better foundation for 
competitive sourcing decisions in the federal government (see app. II). 
In particular, the panel stressed the importance of linking sourcing 
policy with agency missions, promoting sourcing decisions that provide 
value to the taxpayer regardless of the service provider selected, and 
ensuring greater accountability for performance. The panel also 
addressed an area of particular importance for all affected partiesæhow 
the government's sourcing policies are implemented. In this regard, one 
of the sourcing principles was that the government should avoid 
arbitrary numerical or full-time equivalent (FTE) goals. This principle 
is based on the concept that success in government programs should be 
measured in terms of providing value to the taxpayer, not the size of 
the in-house or contractor workforce.

The panel, in one of its 10 sourcing principles, also endorsed creating 
incentives and processes to foster high-performing, efficient, and 
effective organizations and continuous improvement throughout the 
federal government.[Footnote 7] On November 6, 2003, the Comptroller 
General hosted a forum to discuss what it means for a federal agency to 
be high-performing in an environment where results and outcomes are 
increasingly accomplished through partnerships that cut across 
different levels of government and different sectors of the economy. 
There was broad agreement among participants at the forum on the key 
characteristics and capabilities of high-performing organizations, 
which are organized around four broad themes. These four themes are 
(1) clear, well-articulated, and compelling missions; (2) strategic 
use of partnerships; (3) a focus on the needs of clients and customers; 
and (4) strategic management of people.[Footnote 8]

The competitive sourcing process starts with agencies developing 
inventories of their commercial positions in accordance with the 
Federal Activities Inventory Reform (FAIR) Act of 1998.[Footnote 9] 
Additionally, OMB requires agencies to identify activities that are 
inherently governmental, as well as commercial positions that are 
exempt from competition because of legislative prohibitions, agency 
restructuring, or other reasons.[Footnote 10] Only activities 
classified as "commercial" and not otherwise exempt are potentially 
competable. In the 2002 FAIR Act inventories,[Footnote 11] the 
proportion of competable commercial, non-competable commercial, and 
inherently governmental FTE positions varied widely among the agencies 
we reviewed. Governmentwide, competable commercial positions in 2002 
accounted for approximately 26 percent of the total federal workforce. 
Except for the Education Department's 62 percent, the percentage of 
competable commercial positions in each of our selected agencies was 
less than 50 percent of the agency's total FTEs (see app. III).

After agencies identify competable commercial positions under the FAIR 
Act and OMB guidance, they select from these positions which ones to 
compete. Resulting public-private competitions are guided by OMB 
Circular A-76. In May 2003, OMB released a revised Circular A-76. Under 
this revised circular, agencies must use a standard competition process 
for functions with more than 65 FTEs. As part of the standard process, 
agencies identify the work to be performed in a performance work 
statement, establish a team to prepare an in-house proposal to perform 
the work based on a "most efficient organization" (MEO),[Footnote 12] 
and evaluate that proposal along with those submitted by private 
companies and/or public reimbursable sources. For activities with 65 or 
fewer FTEs, agencies may use either a streamlined or standard 
competition. Streamlined competitions require fewer steps than the 
standard process and enable agencies to complete a cost comparison more 
quickly.

Agencies Have Established a Foundation for Their Competitive Sourcing 
Programs:

When the President announced competitive sourcing as one of five 
governmentwide management agenda items in August 2001, few agencies 
other than DOD had an established competitive sourcing infrastructure-
-a key component of OMB's strategy for institutionalizing competitive 
sourcing. Few of the other departments and agencies that we reviewed 
had competitive sourcing experience. Since that time, all six civilian 
agencies we reviewed have established a basic competitive sourcing 
program infrastructure. Leadership involvement and an established 
infrastructure have enabled each agency that we reviewed to develop 
competitive sourcing plans and complete a number of initial 
competitions. Interagency forums for sharing information also have been 
established.

All Agencies We Reviewed Have Made Progress in Developing Their 
Infrastructures:

Although they lack DOD's A-76 experience, the civilian agencies we 
reviewed have made significant progress toward establishing a 
competitive sourcing infrastructure with such actions as establishing 
an office, hiring staff, obtaining contractor support, creating 
policies and procedures, and providing training to agency staff 
involved in the competitive sourcing process. Table 1 provides an 
overview of civilian agency infrastructure development.

Table 1: Overview of Civilian Agency Infrastructure Development:

Then-year dollars.

Agriculture: Structure and staffing:
* Established competitive sourcing office under the Chief Financial 
Officer; 
* Two full-time staff; 
Agriculture: Contract support: 
* $1.16 million in fiscal year 2002; 
* $8.68 million in fiscal year 2003; 
Agriculture: Policies, procedures, and guidance: 
* Departmental guidebook and brochures; 
Agriculture: Training and other resources: 
* Departmentwide training; 
* Web site.

Education: Structure and staffing: 
* Directed by Chief Financial Officer as part of One-ED approach; 
* Nine employee teams assessed functions and processes; 
Education: Contract support: 
* $1.87 million to prepare business cases and $456,000 for training 
and support in fiscal years 2002 and 2003; 
Education: Policies, procedures, and guidance: 
* Primers on reengineering and competitive sourcing; 
Education: Training and other resources: 
* 1-day training; 
* Consultants help teams working on studies.

Health and Human Services: Structure and staffing: 
* Directed by the Office of the Assistant Secretary for Administration 
and Management; 
* Three full-time staff; 
Health and Human Services: Contract support: 
* $7.6 million obligated for competitive sourcing program support and 
studies in fiscal years 2002, 2003, and 2004; 
Health and Human Services: Policies, procedures, and guidance: 
* Fact sheet on competitive sourcing; 
* Policy letters issued and comprehensive guidebook developed; 
Health and Human Services: Training and other resources: 
* Department holds monthly outreach meetings with operating division 
managers; 
* "All-hands" meetings to discuss competitive sourcing and A- 76; 
* Web sites.

Interior: Structure and staffing:
* Directed by Center for Competitive Sourcing Excellence under the 
Deputy Assistant Secretary for Performance and Management; 
* Two full- time staff; 
Interior: Contract support: 
* As of September 26, 2003, $150,000 for support of Center for 
Competitive Sourcing Excellence, including training, FAIR Act 
inventory and database; 
Interior: Policies, procedures, and guidance: 
* Guidance on competitive sourcing and labor-management resolution on 
competitive sourcing; 
* Leadership sent memoranda on its commitment to competitive sourcing; 
Interior: Training and other resources: 
* Departmentwide competitive sourcing workshop; 
* Governmentwide competitive sourcing meetings and conferences; 
* Web site with frequently asked questions and guidance.

Treasury: Structure and staffing:
* Directed by the Office of the Deputy Assistant Secretary for 
Management and Budget; 
* One full-time staff; 
Treasury: Contract support: 
* $1.9 million for training on regulations, information technology 
needs, and other support services as of June 2002; 
Treasury: Policies, procedures, and guidance: 
* Office of the Procurement Executive provided policy guidance; 
Treasury: Training and other resources: 
* Departmentwide conference; 
* Seminars and courses; 
* Encouraged attendance at OPM and OMB training on competitive 
sourcing; 
* Sponsors the Treasury Acquisition Institute.

Veterans Affairs: Structure and staffing:
* Directed by Office of Competitive Sourcing and Management Analysis 
Service under Office of Policy, Planning, and Preparedness; 
* Two Full- Time Equivalent (plans to recruit at least one analyst if 
requisite funds are appropriated); 
Veterans Affairs: Contract support: 
* In fiscal year 2003, VA spent about $663,000 for support items such 
as communication strategies, a training module, and a Web-based 
competitive sourcing study tracking system; 
Veterans Affairs: Policies, procedures, and guidance: 
* Departmental policy directive; 
* Competitive sourcing handbook, communication plan, and human 
resource guidance pamphlet; 
Veterans Affairs: Training and other resources: 
* Training material developed, but training not provided because VA's 
General Counsel determined that use of funds was prohibited by 38 
U.S.C. 8110 (a)(5); 
* Evaluation of pilot training project for practitioners and new 
hires.

Source: Agency information. 

[End of table]

In addition, DOD, which has the most competitive sourcing experience in 
the federal government, has issued numerous policies, procedures, and 
guidance for implementing OMB's Circular A-76. DOD also has established 
a management structure to oversee the department's A-76 
activities.[Footnote 13] In carrying out its competitive sourcing 
program, DOD uses both in-house personnel and contractors to provide 
assistance within the department in developing performance work 
statements and MEOs. In response to our previous recommendation, DOD 
also has established a Web site[Footnote 14] to share competitive 
sourcing knowledge and experience. This Web site is available 
governmentwide.[Footnote 15] The site contains resources such as A-76 
policy and procedures, best practices, sample documents, bid protests, 
and links to other sites with information on Circular A-76.

Studies Completed While Infrastructures Were Put into Place:

The civilian agencies we reviewed completed their initial rounds of 
competitive sourcing studies in fiscal years 2002 and 2003 (see app 
IV). Based on data given to us by five of the six civilian 
departments,[Footnote 16] 602 studies were completed in fiscal year 
2003. Of these 602 studies, 363 were streamlined competitions and 130 
were direct conversions to performance by a contractor.[Footnote 17] In 
addition, DOD completed 126 studies, including 54 direct conversions 
and 7 streamlined competitions.[Footnote 18] Collectively, these 
studies involved over 17,000 FTEs, with almost 57 percent of the FTEs 
studied by DOD and the remaining 43 percent studied by the civilian 
agencies. According to agency data, in-house teams won many of the 
competitions, retaining almost 76 percent of the FTEs covered by the 
studies. (See app. V for details on the outcome of these studies.) 
While agencies have been able to complete these studies while 
establishing their infrastructures, it is too early to assess the 
impact of the studies in terms of efficiencies or performance 
improvements achieved.

Efforts to Share Competitive Sourcing Information across Agencies:

A number of initiatives have been undertaken to share competitive 
sourcing information across agencies. In addition to DOD's Web site, 
at least two interagency forums have been established to facilitate 
interagency information sharing. For example, staff working in 
competitive sourcing offices in various agencies and subagencies 
meet monthly at the civilian agencies' competitive sourcing working 
group to exchange ideas and information. The Federal Acquisition 
Council--composed of senior acquisition officials in the Executive 
Branch--also promotes acquisition-related aspects of the President's 
Management Agenda by providing a forum for monitoring and improving the 
federal acquisition system. The Council has published a guide on 
frequently asked questions and a manager's guide to competitive 
sourcing.

In addition, OMB is developing a competitive sourcing data tracking 
system to provide consistent information and to facilitate the sharing 
of competitive sourcing information by allowing agencies to identify 
planned, ongoing, and completed competitions across the government. 
According to OMB officials, future refinements to the system may allow 
agencies to track and manage their own sourcing activities--a problem 
for most agencies--as well as provide OMB with consistent information. 
OMB plans to use the system to monitor agency implementation of the 
competitive sourcing initiative and generate more consistent and 
accurate statistics, including costs and related savings, for reporting 
to the Congress.

Many Agencies Face Challenges in Implementing Competitive Sourcing:

Despite their progress in establishing a competitive sourcing 
infrastructure and conducting initial competitions in varying degrees, 
the agencies we reviewed continue to face significant challenges in 
four areas. First, agencies have been challenged to develop and use 
FAIR Act inventory data to identify and group positions for 
competition. Second, agencies are operating in a continually changing 
environment and under OMB guidance focused more on meeting milestones 
rather than achieving desired outcomes. Third, agencies have reported 
that they lack the staff needed to carry out the numerous additional 
tasks required under the new Circular A-76. Finally, agencies have 
reported that they lack the funding needed to cover the substantial 
costs associated with implementing their programs.

Agencies Experience Difficulties in Developing Their FAIR Act 
Inventories:

The development of accurate FAIR Act inventories is the foundation for 
determining which functions agencies compete. Agencies reported 
difficulty in classifying positions as inherently governmental or 
commercial and in applying OMB-assigned codes to categorize activities, 
making it challenging for them to identify potential candidates for 
competitions. This has been a persistent problem as we have reported in 
the past.[Footnote 19] Despite changes made to OMB's guidance for 
constructing FAIR Act inventories, the guidance has not alleviated the 
difficulties some agencies have had in developing and maintaining 
useful inventory data.

Classifying Positions as either Inherently Governmental or Commercial 
Is a Complicated Process:

Under the FAIR Act and OMB guidance, agencies annually review and 
classify positions as either inherently governmental or commercial. 
This classification process is done using an OMB-provided coding 
schedule containing nearly 700 functional codes in 23 major categories, 
such as health services, grants management, and installation services. 
Civilian agencies are having difficulty applying these functional 
codes, which were developed by DOD. While intended to promote 
consistency, the codes are not always applicable to civilian agencies, 
requiring some to create supplemental codes to match their missions.

As we have previously reported, selecting and grouping functions and 
positions to compete can be difficult.[Footnote 20] For example, the 
Army has determined that many functions, such as making eyeglasses for 
troops located in a war zone, are core to its mission even though this 
function may not be classified as inherently governmental when 
performed in the United States. Also, some functions may involve both 
"commercial" and "inherently governmental" tasks. While agencies have 
had difficulty classifying mixed positions, OMB's guidance allows 
agencies to take a variety of approaches to address this difficulty. 
For example, according to agency officials, the Internal Revenue 
Service classifies mixed positions on a case-by-case basis considering 
how critical the position is to its mission, not just the percentage of 
tasks related to that position that may be inherently governmental or 
commercial.

The process also can be resource intensive. For example, according to 
agency officials, to determine whether positions should be classified 
as inherently governmental or commercial, the National Park Service--
the largest bureau in the Department of the Interior--used an employee 
team of approximately 30 individuals that represented all occupational 
areas, as well as its human resources and acquisition staff. The team 
used the analysis, in conjunction with payroll system data showing 
employee time usage, to determine the number of commercial and 
inherently governmental FTEs.

Agencies Concerned about Consistency and Timeliness of OMB Guidance:

Accuracy of inventories depends on agency classification of positions, 
based on OMB guidance, as well as consistent OMB review of inventories. 
OMB has updated its FAIR Act inventory guidance annually to address 
issues identified by agencies (see app. VI) and it consults with 
agencies to resolve issues identified. For example, in April 2001, OMB 
created a new requirement to report civilian positions designated as 
inherently governmental. OMB's guidance gives agencies considerable 
latitude in preparing their inventories to determine if an activity is 
commercial.

OMB officials told us they have provided training on Circular A-76 
procedures to its budget examiners, who act as liaisons between OMB and 
each participating agency. The examiners address questions and provide 
guidance on an agency-by-agency basis. OMB does not have formal written 
guidance for reviewing FAIR Act data. Examiners provide verbal guidance 
on an on-going basis to agencies and discuss concerns agencies have 
with the FAIR Act and the related competitive sourcing program. Once 
agencies submit their inventories, OMB officials review the inventories 
looking for "red flags"--that is, deviations from the norm, such as one 
agency listing a position as inherently governmental while others 
classify the same position as commercial--and then consult with agency 
officials as necessary on these deviations. However, a number of 
competitive sourcing officials at two interagency forums expressed 
concern about the process. For example, one official told us that an 
OMB program examiner said there were too many function codes in one 
agency's inventory. Then, after the agency resubmitted its inventory, 
the same examiner said the inventory had too few codes. An official 
from another agency told us that its OMB examiners did not appear 
familiar with OMB's own guidance for applying the function codes. Given 
the lack of formal written OMB guidance on reviewing the FAIR Act 
inventory data, there is little assurance that OMB's review of 
inventories will be consistent across agencies.

According to a number of agency officials, implementation of OMB 
guidance is further complicated due to time constraints. OMB inventory 
guidance is typically issued in the spring, and agency inventories are 
due to OMB by June 30. Officials contend that more time is needed to 
properly implement the guidance. In response, OMB officials pointed out 
that the basic guidance for developing inventories is set forth in 
Circular A-76 and agencies can undertake significant steps to prepare 
their inventories based on the Circular's guidance.

OMB Guidance Has Focused More on Meeting Targets and Milestones Than on 
Improving Outcomes:

The ultimate goal of the competitive sourcing initiative is to improve 
government performance and efficiency. To date, however, OMB's 
competitive sourcing guidance to federal agencies has focused more on 
targets and milestones for conducting competitions than on the outcomes 
the competitions are designed to produce: savings, innovation, and 
performance improvements. Although recent OMB guidance has stressed the 
need for agencies to be more strategic, the emphasis in the guidance is 
still more on process than results. The President's Management Agenda 
established expected results for the competitive sourcing initiative to 
encourage innovation, increase efficiency, and improve performance of 
agencies. The Commercial Activities Panel similarly stated that the 
success of government programs, such as competitive sourcing, should be 
measured by the results achieved in terms of providing value to 
the taxpayer.

Since the inception of the competitive sourcing initiative in 2001, 
agencies have faced continual changes to OMB's targets and guidance for 
conducting public-private competitions.[Footnote 21] OMB initially set 
a target for agencies to compete or directly convert at least 5 percent 
of their full-time equivalent commercial positions by the end of fiscal 
year 2002, and an additional 10 percent by the end of fiscal year 2003. 
They also set a long-term target for agencies to compete at least 
50 percent of commercial FTEs. OMB later moved to agency-specific plans 
that reflect each agency's own mission and workforce mix. OMB also 
developed a traffic light system (red, yellow, green) for evaluating 
the progress agencies are making in implementing these plans. Table 2 
shows the chronology of these changes.

Table 2: Timeline of Selected Competitive Sourcing Initiative Events:

March 2001: OMB set 5-percent FTE target for fiscal year 2002 and a 
long-term goal of 50 percent; 
August 2001: OMB set an additional 10-percent target for 2003; 
May 2003: OMB released revised Circular A-76; 
July 2003: OMB replaced governmentwide goals with agency-specific 
plans; 
December 2003: OMB issued guidance on the development of "green" 
competition plans.

Source: OMB documents.

[End of table]

As shown in table 2, in December 2003, OMB released a memorandum with 
guidance on developing competitive sourcing plans that would receive a 
"green" rating under its traffic light evaluation system (see 
app. VII). The guidance notes the need for a long-range vision, 
strategic action by agencies, and public-private competitions tailored 
to the agency's unique mission and goals. The memorandum also advises 
agencies to include in their plans their general decision-making 
process for selecting activities to compete, identification of 
activities to be competed, potential constraints, and plans for 
handling activities suitable for competition that the agency does not 
intend to compete.

Neither OMB's initial FTE-based goals nor its revised competitive 
sourcing goals and traffic light evaluation system calls for agencies 
to assess how their plans for competitive sourcing could achieve the 
broader improvements envisioned by the President's Management Agenda or 
the Commercial Activities Panel. In this regard, the Panel said that 
arbitrary competition goals should be avoided. In testimony before the 
Congress, the Comptroller General has stated that OMB's initial 
competition targets were inappropriate. Similarly, OMB's revised goals 
continue to emphasize process milestones such as competitions completed 
more than enhancing value through performance improvements and 
efficiencies. For example, for an agency to receive a "green" rating on 
OMB's scorecard, it must have developed an OMB-approved green 
competition plan, have publicly announced standard competitions in 
accordance with the schedule in its green plan, and have completed 
95 percent of streamlined competitions in 90 days. The emphasis 
throughout OMB's most recent guidance is similarly more on process than 
on results.

Agencies have used a range of criteria to select positions for 
competition. For most agencies, selection criteria have been based on 
the size and composition of the workforce, such as attrition rates, 
skill needs, and difficulty in hiring, as well as the agency's 
capability to manage the competitions. Because these agencies have 
focused on meeting targets to announce and complete competitions, they 
have not assessed broader issues, such as weighing potential 
improvements against the costs and risks associated with performing the 
competitions. Some agencies, however, used a broader set of factors 
such as the function's contribution to the mission, risks associated 
with the function being contracted out, and the potential return on 
investment. (See app. VIII for further discussion on the criteria these 
agencies have used to select positions for competition.):

Human Capital Challenges:

Officials in most of the agencies we reviewed expressed concern that 
they lack sufficient staff to perform the additional tasks included in 
the recently revised Circular A-76. To address this challenge, the 
Federal Acquisition Council is currently studying agency staffing and 
skill requirements. As we previously reported, agencies need to build 
and maintain capacity to manage competitions, build the in-house MEO, 
and oversee the implementation of competition decisions[Footnote 22]--
skills that the Commercial Activities Panel recognized may require 
additional capacity. Adding to this complexity is agencies' need to 
consider their competitive sourcing staffing capacity in the context of 
their strategic human capital management, an area we have identified as 
high-risk governmentwide and one of the five President's Management 
Agenda governmentwide initiatives. For example, we recently reported 
[Footnote 23] that DOD's civilian human capital strategic plan does not 
address the respective roles of civilian and contractor personnel or 
how DOD plans to link its human capital initiatives with its sourcing 
plans, such as efforts to outsource non-core responsibilities. Finally, 
ensuring and maintaining employee morale is also a challenge for 
agencies.

OMB's revised Circular A-76 emphasizes the following key competitive 
sourcing phases: preparing an inventory of agency's activities, 
preliminary planning, announcing and conducting the competition, 
conducting the competition using either a streamlined or standard 
competition process, implementing the performance decision, and 
conducting post-competition accountability activities (see fig. 1). 
Each phase involves a number of tasks.

Figure 1: Major Competitive Sourcing Phases and Related Tasks:

[See PDF for image]

[A] Agency inventory process is not done for each specific competition, 
but is required under the FAIR Act. bCompetitive Sourcing Officials 
appoint competition officials for each standard competition, and, as 
appropriate, may appoint competition officials for streamlined 
competitions. These include: Agency Tender Official, Contracting 
Officer, Performance Work Statement Team Leader, Human Resource 
Advisor, and Source Selection Authority.

[End of figure]

According to agency officials, many of these tasks require skills and 
human capital resources beyond those currently available. As we 
reported in December 2002, in the current environment, acquisition 
staff can no longer simply be purchasers or process managers. Rather, 
they need to be adept at analyzing business problems and in helping to 
develop acquisition strategies.[Footnote 24] For example, human 
capital, job, and market analysis skills are needed to inventory agency 
activities; benchmarking, and strategic and workforce planning skills 
are needed to conduct the preliminary planning; organizational 
analysis, contract management and cost analysis skills are needed to 
conduct competitions; and financial management and oversight skills are 
needed in the implementation and post-competition phase. Some skills, 
such as labor relations and information technology, are required 
throughout the competitive sourcing process.

Despite these additional personnel requirements, many department-level 
offices in the civilian agencies we reviewed have only one or two full-
time staff to complete FAIR Act inventories, interpret new laws and 
regulations, and oversee agency selection of positions to compete and 
the competitions. Officials at the six civilian agencies we reviewed 
stated it would be helpful to have additional personnel well versed in 
the use of Circular A-76. Even DOD, the leader among federal agencies 
in competitive sourcing and A-76, may face human capital challenges in 
running its competition program. According to a cognizant Army 
competitive sourcing official who has analyzed this issue, the Army's 
implementation of the revised Circular A-76 will require approximately 
100 to 150 additional personnel, including attorneys, human resources 
specialists, and contracting officials. A final determination on Army 
staffing requirements and capabilities has not been made.

As we reported in June 2003, building the capacity to conduct 
competitions as fairly, effectively, and efficiently as possible will 
likely be a challenge for all agencies, but particularly those that 
have not previously been invested in competitive sourcing.[Footnote 25] 
The Commercial Activities Panel also recognized in its recommendations 
that accurate cost comparisons, accountability, and fairness would 
require high-level commitment from leadership; adequate, sustained 
attention and resources; and technical and other assistance in 
structuring the MEO, as well as centralized teams of trained personnel 
to conduct the cost comparisons. According to officials of the Federal 
Acquisition Council, its competitive sourcing working group is now 
inventorying agency resources, skill sets and training needs required 
to address this challenge.

At the same time, agencies we reviewed are challenged to maintain 
employee morale. While most agencies have established vehicles for 
communicating their competitive sourcing goals internally--such as work 
groups and Web sites--officials from OMB report that it is difficult to 
convince employees that the current competitive sourcing program is 
designed to create value and improve efficiency, not to reduce the size 
of the federal workforce--as was the case with past competitive 
sourcing efforts.

Funding Challenges:

Funding their competitive sourcing programs also has been cited as a 
challenge for agencies. Officials in some of the agencies we reviewed 
cited limited funding as a barrier to implementing their competitive 
sourcing programs. Such program costs can be significant--at both the 
department and agency levels. For example, USDA reported spending a 
total of $36.3 million in fiscal years 2002 and 2003 on its competitive 
sourcing program. The Forest Service, part of USDA, accounted for 
$18.7 million of USDA's $36.3 million on competitive sourcing. In 
fiscal year 2003, NIH reported spending approximately $3.5 million on 
contract support for two competitions involving more than 1,400 
positions.[Footnote 26] The National Park Services' financial needs 
prompted the agency to ask the Congress for permission to reprogram 
$1.1 million to help pay for its competitive sourcing program. Other 
agency officials stated that funding to finance their competitive 
sourcing initiatives was taken from other agency activities. As we have 
previously reported,[Footnote 27] DOD has also been challenged to 
ensure adequate funding for implementing competitive sourcing under 
Circular A-76. Finally, in August 2003, the Department of Veterans 
Affairs terminated all competitive sourcing studies as its General 
Counsel determined that the prohibition regarding funds from the three 
health care appropriation accounts under 38 U.S. C. 8110 (a)(5) is 
applicable.[Footnote 28]

According to officials from most of the agencies we reviewed, they 
have funded their competitive sourcing programs using existing funds. 
However, some officials told us that OMB recently instructed their 
agencies to include a line item in their fiscal year 2005 budget 
request for their competitive sourcing programs. Doing so should 
provide agencies with a more stable fiscal environment in which to plan 
and conduct competitions.

Some Agencies Used Strategic Approach to Identify and Prioritize 
Activities for Competition:

Several agencies have developed strategic and transparent competitive 
sourcing approaches by integrating their strategic and human capital 
plans with their competitive sourcing plans--an approach encouraged by 
the Commercial Activities Panel. These approaches have gone beyond the 
requirement to identify positions for competition as called for in 
OMB's initial FTE targets. These approaches employ broader functional 
assessments of FAIR Act inventories and more comprehensive analysis of 
factors such as mission impact, potential savings, risks, current level 
of efficiency, market conditions, and current and projected workforce 
profiles. Not only do these agencies' processes identify viable 
activities for competition, they also provide greater transparency in 
this critical part of the process. Some of these approaches are 
summarized below. Appendix VIII contains a more detailed discussion of 
these approaches. While it is too early to tell whether the various 
agencies' approaches will be effective, a key to success will be 
learning from them and adapting them to each agency's unique 
circumstances.

OMB has recognized the challenges that agencies have faced in 
implementing their competitive sourcing programs and recently publicly 
endorsed agencies' use of a more strategic approach to competitive 
sourcing.[Footnote 29] For example, OMB supported the innovative 
approaches some agencies have taken to ensure sound planning and 
effective use of public-private competitions. OMB further stated that 
consulting with program, human resources, acquisition, budget, and 
legal professionals facilitates effective communication and a broad-
based understanding of competitive sourcing actions within the agency.

NIH Uses Decision Support Software:

Officials from HHS' National Institutes of Health told us they used a 
steering committee of senior-level officials to determine the 
activities to be competed under its competitive sourcing program. This 
committee used a systematic approach that considered FAIR Act inventory 
data, the knowledge and experience of program managers, and a decision 
support software application to capture the judgments of managers 
familiar with the commercial activity under study. The software 
application used a set of evaluation questions that assessed a function 
regarding NIH's mission, human capital and risk, and recorded and 
scored managers' responses.

Committee officials then reviewed the scores produced by the software, 
considering factors such as (1) the activity's impact on NIH's mission, 
(2) costs, (3) socioeconomic impacts, and (4) potential advantages to 
competing the activity. NIH officials also stated that once a decision 
has been made to compete an activity, consideration is given to 
re-engineering the applicable business process, whether the activity 
remains in-house or undergoes a public-private competition.

IRS Uses Business Case Analysis:

Officials from the Internal Revenue Service, a bureau of the Department 
of the Treasury, told us they used business case analysis and an 
enterprisewide approach to determine if a commercial function has the 
potential to create significant business process improvements and a 
sizable return on investment. The business case analysis, which is 
completed in approximately 4 to 6 months, calculates the economic 
benefits of potential alternatives based on IRS responses to critical 
questions such as: Is the function core to the mission? What does the 
function cost? Is there potential to reduce cost and/or improve 
productivity by competing the function? How does the function fit into 
other current or planned strategic projects?

An IRS competitive sourcing official cited several benefits from the 
business case approach used during the planning stage:

* up-front consideration of major decision variables such as economics, 
market research, and risk;

* involvement of top-level management and leadership;

* the ability to test candidate projects against strategic goals and 
performance improvement objectives; and:

* low investment of resources to qualify or reject an activity as a 
competitive sourcing project.

Army's "Core, Non-Core" Approach Is Evolving:

The Army's "core, non-core concept" for assessing functions employed a 
more strategic approach. Initially, the Army's approach for classifying 
positions for its inventory focused on determining whether functions 
were core or non-core to the agency's mission. However, the Army found 
that such a distinction did not, by itself, provide a good basis for a 
decision, and that other factors, such as risk and operational 
considerations, also must be considered. A cognizant Army official told 
us that focusing on positions does not consider how well the function 
is being performed or who should perform the function--military, 
civilian, contractor, or some combination of these. In contrast, the 
Army learned that looking at broader functional areas, such as 
utilities and family housing, as opposed to positions, should allow 
them to better identify potential positions for competition. For 
example, functions such as childcare and equal employment opportunity 
operations, while not inherently governmental, are exempt from 
competitive sourcing because they are important for reasons such as 
military morale and quality of life. According to a DOD competitive 
sourcing official, the Army's approach is evolving and is unique within 
DOD.

Officials at four civilian agencies in our review expressed similar 
concerns that the Army official expressed on developing their 
inventories. Officials told us that given the investment of time and 
resources required to develop an inventory, agencies should focus on 
mission-related functions rather than individual positions.

Education Uses Integrated Approach:

The Department of Education's "One-ED" initiative also used strategic 
approaches in identifying candidates for competition. One-ED covers all 
elements of major departmental operations, and seeks management changes 
through integrated human capital reform, competitive sourcing, and 
organizational restructuring. As part of its broader approach, the 
department developed its FAIR Act inventory by analyzing key processes 
in the activities under consideration. It then used the results of this 
process to restructure positions as either commercial or inherently 
governmental and frame a broader analysis of the function's activities.

Conclusion:

The ultimate success of the administration's competitive sourcing 
initiative hinges on the extent to which agencies achieve the 
efficiencies, innovation, and improved performance envisioned by the 
President's Management Agenda. Successful implementation of this 
initiative requires results-oriented goals and strategies; clear 
criteria and analysis to support agency decisions; and adequate 
resources. OMB, in its leadership role, has a difficult task in guiding 
this initiative and must balance the need for transparency and 
consistency with the flexibility agencies need in implementing 
significant changes to operations. While OMB is addressing the funding 
and human capital challenges that agencies face, it needs to ensure 
that the FAIR Act inventory and goal-setting process is more strategic 
and helpful to agencies in carrying out their competitive sourcing 
responsibilities. Recognizing that agency missions, organizational 
structures, and workforce composition vary widely, the Commercial 
Activities Panel provided a framework of sourcing principles that 
provide an implementation roadmap for this initiative. However, OMB's 
current emphasis on meeting implementation milestones and targets does 
not fully align with these principles or ensure achievement of the 
ultimate goal of increasing efficiency and improving the performance of 
commercial activities. OMB needs to work with agencies to ensure their 
long-range plans are strategically focused. A more strategic approach 
focused on achieving improvement outcomes would help focus agency 
efforts and better achieve the results envisioned at the outset of the 
competitive sourcing initiative.

Recommendations for Executive Action:

To complement efforts already underway that address funding and human 
capital challenges and to help agencies realize the potential benefits 
of competitive sourcing and ensure greater transparency and 
accountability, we recommend that the Director of OMB take the 
following three actions:

* ensure greater consistency in the classification of positions as 
commercial or inherently governmental when positions contain a mix of 
commercial and inherently governmental tasks by reviewing current 
guidance and developing additional guidelines, as necessary, for 
agencies and OMB examiners;

* work with agencies to ensure they are more strategic in their 
sourcing decisions and are identifying broader functional areas and/or 
enterprisewide activities, as appropriate, for possible public-private 
competition; and:

* require agencies to develop competition plans that focus on achieving 
measurable efficiency and performance improvement outcomes.

Agency Comments and Our Evaluation:

We provided a draft of this report to OMB and the seven agencies for 
their review and comment. OMB provided oral comments concurring with 
our three recommendations, but disagreed with our conclusion that OMB's 
recent guidance on competitive sourcing emphasized process more than 
results. Based on our review of the factors OMB considers in its review 
of agency plans, we continue to believe that factors such as the 
agency's ability to conduct competitions are emphasized more than 
results such as expected savings and the potential for improved 
performance as called for in the President's Management Agenda.

On the first recommendation, OMB officials concurred that there needs 
to be consistency in the classification of positions and stated that 
OMB will review its current guidance in light of the findings in this 
report to determine how best to help agencies that have had 
difficulties in classifying their activities. OMB officials stated that 
they would consider additional guidelines as necessary.

OMB officials, while agreeing with the second and third 
recommendations, emphasized that long-range "green" plans are intended 
to ensure that agencies think strategically in choosing activities for 
review and routinely take into account the type of factors that will 
ensure successful application of competition. OMB reiterated that 
before an agency may receive a green score on the President's 
Management Agenda scorecard, the agency must have an approved green 
competition plan.

OMB stated that its evaluation of plans will not be one-dimensional, 
but instead will account for each agency's unique mission and workforce 
needs and demonstrated ability to conduct reviews in a reasonable and 
responsible manner. OMB will also review agency plans to understand how 
the agency has selected activities and their potential for savings and 
performance improvements. However, while OMB's guidance mentions the 
importance of improving the cost effectiveness and quality of 
commercial operations, we note that the guidance does not cite the 
potential for savings or improved performance as factors OMB will look 
for when reviewing agency green plans.

The Department of Agriculture and the Department of the Interior 
concurred with our report. The Department of the Treasury stated that 
the report's recommendations were timely. The Department of Education 
and DOD did not have any comments. The Department of the Interior, HHS, 
OMB and VA provided technical comments, which were incorporated as 
appropriate.

We are sending copies of this report to other interested congressional 
committees; the Director, Office of Management and Budget; the 
Administrator, Office of Federal Procurement Policy; and the 
Secretaries of Agriculture, Defense, Education, Health and Human 
Services, the Interior, the Treasury, and Veterans Affairs. We also 
will provide copies to others on request. This report will also be 
available at no charge on GAO's Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at 
(202) 512-4841 or John K. Needham at (202) 512-5274. Other major 
contributors to this report were Robert L. Ackley, Christina M. 
Cromley, Thomas A. Flaherty, Rosa M. Johnson, Nancy T. Lively, William 
M. McPhail, Karen M. Sloan, Marilyn K. Wasleski, and Anthony J. 
Wysocki.

Signed by: 

William T. Woods: 
Director, Acquisition and Sourcing Management:

[End of section]

Appendix I: Scope and Methodology:

To describe the progress DOD and the civilian agencies have made in 
establishing the competitive sourcing program in response to the 
President's Management Agenda, we interviewed officials at the 
Department of Agriculture; DOD; and the Departments of Education, 
Health and Human Services, the Interior, the Treasury, and Veterans 
Affairs. We selected the agencies based on the number of commercial 
positions in their 2001 FAIR Act inventories. The agencies selected 
represent 84 percent of the 2002 FAIR Act inventory of commercial 
positions among the 26 executive branch agencies implementing the 
President's Management Agenda. We selected the Department of Education 
because OMB highlighted its unique approach to implementing the 
competitive sourcing initiative. We obtained and reviewed pertinent 
documents from the seven government agencies. We also met with members 
of the Civilian Agency Competitive Sourcing Working Group, executive 
members of the Federal Acquisition Council and its Working Group on 
Competitive Sourcing, and attended several competitive sourcing 
conferences and workshops. We reviewed statutes and circulars governing 
this program and reports on competitive sourcing. We also reviewed 
reports on related subjects such as human capital, costs, and savings 
that were issued by academic and independent research organizations.

To identify what, if any, challenges exist for the agencies in 
implementing the competitive sourcing initiative, we interviewed 
senior-level officials at the seven competitive sourcing programs. In 
identifying the challenges agencies face, we also reviewed OMB and 
agency guidance as well as criteria and data used to develop 
inventories and select the activities to study and compete. We 
discussed management expertise, training requirements, planned 
contract support and contract oversight, timeline and budget impact to 
achieve fiscal year 2003 goals as well as intra-agency interactions, 
including budget and human resources offices.

To identify strategies agencies are using to identify activities for 
competition, we discussed extensively the alternatives and strategies 
agencies used to take a more strategic approach and obtained contractor 
documents, if available. These studies, conducted in support of a 
"compete/no compete" decision, gave us insight regarding decision 
criteria, competitive sourcing strategies, and costs involved.

We did not evaluate savings from completed competitions during this 
review as the program is new and such data are limited. The FAIR Act 
inventory data used in this report have been reviewed by OMB, reported 
to Congress, and made available to the public and covers the years 
2000, 2001, and 2002. We did not independently verify this information. 
OMB-reviewed data for 2003 were not available for all agencies at the 
time of our review.

We performed our review between April and December 2003 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Guiding Principles for Competitive Sourcing:

In 2000, Congress enacted legislation creating the Commercial 
Activities Panel and mandating a study of the government's competitive 
sourcing process.[Footnote 30] The Commercial Activities Panel's 
mission was to devise a set of recommendations that would improve the 
government's sourcing framework and processes so that they would 
reflect a balance among the taxpayer interests, government needs, 
employee rights, and contractor concerns.

In April 2002, the panel released its report[Footnote 31] with 
recommendations that included 10 sourcing principles to guide federal 
sourcing policy. The panel believed that federal sourcing policy 
should:

* support agency missions, goals, and objectives;

* be consistent with human capital practices designed to attract, 
motivate, retain, and reward a high-performing federal workforce;

* recognize that inherently governmental functions and certain others 
should be performed by federal workers;

* create incentives and processes that foster high-performing, 
efficient, and effective organizations throughout the federal 
government;

* be based on a clear, transparent, and consistently applied process;

* avoid arbitrary FTE or other arbitrary numerical goals;

* establish a process that, for activities that may be competitively 
sourced, would permit public and private sources to participate in 
competitions for work currently performed in-house and work currently 
contracted to the private sector as well as new work;

* ensure that competitions are conducted fairly, effectively, and 
efficiently;

* ensure that competitions involve a process that considers both 
quality and cost factors; and:

* provide for accountability in all sourcing decisions.

[End of section]

Appendix III: 2002 FAIR Act Inventories:

Agency: USDA; 
Total FTEs: 99,902; 
Total commercial FTEs: Number: 53,394; 
Total commercial FTEs: Percent of total FTEs: 53.4; 
Competable commercial FTEs: Number: 35,600; 
Competable commercial FTEs: Percent of total FTEs: 35.6.

Agency: DOD[A]; 
Total FTEs: 596,570; 
Total commercial FTEs: Number: 410,699; 
Total commercial FTEs: Percent of total FTEs: 68.8; 
Competable commercial FTEs: Number: 239,001; 
Competable commercial FTEs: Percent of total FTEs: 40.1.

Agency: Education; 
Total FTEs: 4,710; 
Total commercial FTEs: Number: 3,062; 
Total commercial FTEs: Percent of total FTEs: 65.0; 
Competable commercial FTEs: Number: 2,903; 
Competable commercial FTEs: Percent of total FTEs: 61.6.

Agency: HHS; 
Total FTEs: 62,604; 
Total commercial FTEs: Number: 32,095; 
Total commercial FTEs: Percent of total FTEs: 51.0; 
Competable commercial FTEs: Number: 11,641; 
Competable commercial FTEs: Percent of total FTEs: 18.6.

Agency: Interior; 
Total FTEs: 69,147; 
Total commercial FTEs: Number: 32,900; 
Total commercial FTEs: Percent of total FTEs: 47.6; 
Competable commercial FTEs: Number: 26,545; 
Competable commercial FTEs: Percent of total FTEs: 38.3.

Agency: Treasury; 
Total FTEs: 148,100; 
Total commercial FTEs: Number: 27,103; 
Total commercial FTEs: Percent of total FTEs: 18.3; 
Competable commercial FTEs: Number: 12,313; 
Competable commercial FTEs: Percent of total FTEs: 8.3.

Agency: VA; 
Total FTEs: 221,541; 
Total commercial FTEs: Number: 190,546; 
Total commercial FTEs: Percent of total FTEs: 86.0; 
Competable commercial FTEs: Number: 4,870; 
Competable commercial FTEs: Percent of total FTEs: 2.2. 

Source: GAO analysis of 2002 FAIR Act data.

Note: Full-time equivalent (FTE) is a measure of federal civilian 
employment. One FTE is equal to one work-year of 2,080 hours. As of 
January 23, 2004, OMB had publicly released 2003 FAIR Act inventory 
data for only three of our selected agencies.

[A] According to DOD, these FAIR Act inventory numbers do not include 
military, foreign nationals. depot-level maintenance and repair 
commercial activities, DOD Inspector General, civilian performance of 
any commercial activities that have already been contracted out, and 
the DOD intelligence community.

[End of table]

[End of section]

Appendix IV: Competitive Sourcing Studies Initiated and Completed in 
2002 and 2003:

Agency: USDA; 
Positions Studied (FTEs): 2002: 379; 
Positions Studied (FTEs): 2003: 7,111; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2002: 6; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2003: 3,776; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2002: 373; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2003: 660.

Agency: DOD; 
Positions Studied (FTEs): 2002: 8,477; 
Positions Studied (FTEs): 2003: 3,434; 
Results of Completed Studies (FTEs)[A]: 
Remain in-house: 2002: 16,886[B]; 
Results of Completed Studies (FTEs)[A]: 
Remain in-house: 2003: 7,826[B]; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2002: 7,185[B]; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2003: 2,167[B].

Agency: Education; 
Positions Studied (FTEs): 2002: 0; 
Positions Studied (FTEs): 2003: 230; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2002: 0; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2003: Pending; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2002: 0; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2003: Pending.

Agency: HHS; 
Positions Studied (FTEs): 2002: 775; 
Positions Studied (FTEs): 2003: 2,192; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2002: 165; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2003: 1,592; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2002: 610; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2003: 600.

Agency: Interior[C]; 
Positions Studied (FTEs): 2002: [Empty]; 
Positions Studied (FTEs): 2003: [Empty]; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2002: [Empty]; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2003: [Empty]; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract- out: 2002: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract- out: 2003: [Empty].

Agency: Treasury[D]; 
Positions Studied (FTEs): 2002: 4,170; 
Positions Studied (FTEs): 2003: [Empty]; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2002: 234; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2003: [Empty]; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract- out: 2002: 487; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2003: [Empty].

Agency: VA; 
Positions Studied (FTEs): 2002: 0; 
Positions Studied (FTEs): 2003: 1,380[E]; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2002: 0; 
Results of Completed Studies (FTEs)[A]: Remain in-house: 2003: [Empty]; 
Results of Completed Studies (FTEs)[A]: [Empty]; 
Results of Completed Studies (FTEs)[A]: Contract- out: 2002: 0; 
Results of Completed Studies (FTEs)[A]: Contract-out: 2003: 120[F]. 

Source: GAO analysis of agency data.

[A] Full-time equivalent (FTE) is a measure of federal civilian 
employment. One FTE is equal to one work-year of 2,080 hours.

[B] For DOD, these numbers include studies initiated prior to 2002 or 
2003.

[C] Interior provided only aggregated data for 2002 and 2003. Over this 
2-year period, 2,483 FTEs were studied. Of those FTEs, 968 remained in-
house and 1,515 were contracted out.

[D] Data represent bureaus remaining after transfer made to the 
Department of Homeland Security. Actions on 3,449 FTEs are underway; 
some are in the planning stage, while others await senior management 
approval before results are announced.

[E] Studies of these positions were initiated but not completed because 
VA's General Counsel determined that use of funds for this purpose was 
prohibited by 38 U.S.C. 8110 (a)(5).

[F] Veterans Affairs had one formal A-76 competitionæVeterans Benefits 
Administration Property Management Services. This study began in 1999, 
competition was announced in 2001, and the contract was awarded in 
August 2003.

[End of table]

[End of section]

Appendix V: Disposition of Competable Commercial FTEs Where Studies 
Completed:

Table 3: Disposition of 2002 Competable Commercial FTEs Where Studies 
Have Been Completed:

USDA: Number of studies; 
Direct conversions[A]: 11; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: 0; 
Total: 11. 

USDA: Total FTEs studied; 
Direct conversions[A]: 379; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: 0; 
Total: 379. 

USDA: In-house wins; 
Direct conversions[A]: 6; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: 0; 
Total: 6. 

USDA: Contract out; 
Direct conversions[A]: 373; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: 0; 
Total: 373. 

HHS: Number of studies; 
Direct conversions[A]: 133; 
Streamlined competitions: 33; 
Full competitions: 0; 
Other[B]: 0; 
Total: 166. 

HHS: Total FTEs studied; 
Direct conversions[A]: 599; 
Streamlined competitions: 176; 
Full competitions: 0; 
Other[B]: 0; 
Total: 775. 

HHS: In-house wins; 
Direct conversions[A]: 0; 
Streamlined competitions: 165; 
Full competitions: 0; 
Other[B]: 0; 
Total: 165. 

HHS: Contract out; 
Direct conversions[A]: 599; 
Streamlined competitions: 11; 
Full competitions: 0; 
Other[B]: 0; 
Total: 610. 

DOD: Number of studies; 
Direct conversions[A]: 58; 
Streamlined competitions: 5; 
Full competitions: 112; 
Other[B]: [Empty]; 
Total: 175. 

DOD: Total FTEs studied; 
Direct conversions[A]: 1,153; 
Streamlined competitions: 171; 
Full competitions: 22,148; 
Other[B]: [Empty]; 
Total: 23,472. 

DOD: In-house wins; 
Direct conversions[A]: 121; 
Streamlined competitions: 171; 
Full competitions: 16,565; 
Other[B]: [Empty]; 
Total: 16,857. 

DOD: Contract out; 
Direct conversions[A]: 1,032; 
Streamlined competitions: 0; 
Full competitions: 5,583; 
Other[B]: [Empty]; 
Total: 6,615. 

Education: Number of studies; 
Direct conversions[A]: 0; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 0. 

Education: Total FTEs studied; 
Direct conversions[A]: 0; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 0. 

Education: In-house wins; 
Direct conversions[A]: 0; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 0. 

Education: Contract out; 
Direct conversions[A]: 0; 
Streamlined competitions: 0; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 0. 

Treasury: Number of studies; 
Direct conversions[A]: 6; 
Streamlined competitions: 3; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 9. 

Treasury: Total FTEs studied; 
Direct conversions[A]: 109; 
Streamlined competitions: 72; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 181. 

Treasury: In-house wins; 
Direct conversions[A]: 0; 
Streamlined competitions: 70; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 70. 

Treasury: Contract out; 
Direct conversions[A]: 109; 
Streamlined competitions: 2; 
Full competitions: 0; 
Other[B]: [Empty]; 
Total: 111. 

Total: Number of studies; 
Direct conversions[A]: 208; 
Streamlined competitions: 41; 
Full competitions: 112; 
Other[B]: [Empty]; 
Total: 361. 

Total: Total FTEs studied; 
Direct conversions[A]: 2,240; 
Streamlined competitions: 419; 
Full competitions: 22,148; 
Other[B]: [Empty]; 
Total: 24,807. 

Total: In-house wins; 
Direct conversions[A]: 127; 
Streamlined competitions: 406; 
Full competitions: 16,565; 
Other[B]: [Empty]; 
Total: 17,098. 

Total: Contract out; 
Direct conversions[A]: 2,113; 
Streamlined competitions: 13; 
Full competitions: 5,583; 
Other[B]: [Empty]; 
Total: 7,709. 

Source: GAO analysis of agency data. 

Note: The Interior Department provided aggregated data for 2002. Over 
this 2-year period, 2002 and 2003, it studied 2,483 FTEs. On these, 
968 were retained in-house and 1,515 were contracted out. 

In addition, VA did not initiate any studies in 2002. 

[A] Direct conversions are not competitions, but are included in this 
table as they represent federal employee positions whose work has been 
outsourced to the private sector. 

[B] Includes various OMB approved approaches. 

[End of table]

Table 4: Disposition of 2003 Competable Commercial FTEs Where Studies 
Have Been Completed:

USDA: Number of studies; 
Direct conversions: 15; 
Streamlined competitions: 307; 
Full competitions[A]: 3; 
Other[B]: 92; 
Total: 417. 

USDA: Total FTEs studied; 
Direct conversions: 150; 
Streamlined competitions: 3,256; 
Full competitions[A]: 410; 
Other[B]: 620; 
Total: 4,436. 

USDA: In-house wins; 
Direct conversions: 0; 
Streamlined competitions: 3,250; 
Full competitions[A]: 290; 
Other[B]: 236; 
Total: 3,776. 

USDA: Contract out; 
Direct conversions: 150; 
Streamlined competitions: 6; 
Full competitions[A]: 120; 
Other[B]: 384; 
Total: 660. 

HHS: Number of studies; 
Direct conversions: 96; 
Streamlined competitions: 45; 
Full competitions[A]: 7; 
Other[B]: 0; 
Total: 148. 

HHS: Total FTEs studied; 
Direct conversions: 569; 
Streamlined competitions: 645; 
Full competitions[A]: 978; 
Other[B]: 0; 
Total: 2,192. 

HHS: In-house wins; 
Direct conversions: 0; 
Streamlined competitions: 614; 
Full competitions[A]: 978; 
Other[B]: 0; 
Total: 1,592. 

HHS: Contract out; 
Direct conversions: 569; 
Streamlined competitions: 31; 
Full competitions[A]: 0; 
Other[B]: 0; 
Total: 600. 

DOD: Number of studies; 
Direct conversions: 54; 
Streamlined competitions: 7; 
Full competitions[A]: 65; 
Other[B]: [Empty]; 
Total: 126. 

DOD: Total FTEs studied; 
Direct conversions: 873; 
Streamlined competitions: 298; 
Full competitions[A]: 8,822; 
Other[B]: [Empty]; 
Total: 9,993. 

DOD: In-house wins; 
Direct conversions: 105; 
Streamlined competitions: 298; 
Full competitions[A]: 7,423; 
Other[B]: [Empty]; 
Total: 7,826. 

DOD: Contract out; 
Direct conversions: 768; 
Streamlined competitions: 0; 
Full competitions[A]: 1,399; 
Other[B]: [Empty]; 
Total: 2,167. 

Education: Number of studies; 
Direct conversions: 0; 
Streamlined competitions: 1; 
Full competitions[A]: 4; 
Other[B]: [Empty]; 
Total: 5. 

Education: Total FTEs studied; 
Direct conversions: 0; 
Streamlined competitions: 10; 
Full competitions[A]: 220; 
Other[B]: [Empty]; 
Total: 230. 

Education: In-house wins; 
Direct conversions: 0; 
Streamlined competitions: Pending; 
Full competitions[A]: Pending; 
Other[B]: [Empty]; 
Total: 0. 

Education: Contract out; 
Direct conversions: 0; 
Streamlined competitions: Pending; 
Full competitions[A]: Pending; 
Other[B]: [Empty]; 
Total: 0. 

Treasury: Number of studies; 
Direct conversions: 19; 
Streamlined competitions: 10; 
Full competitions[A]: 2; 
Other[B]: [Empty]; 
Total: 31. 

Treasury: Total FTEs studied; 
Direct conversions: 290; 
Streamlined competitions: 145; 
Full competitions[A]: 47; 
Other[B]: [Empty]; 
Total: 482. 

Treasury: In-house wins; 
Direct conversions: 0; 
Streamlined competitions: 145; 
Full competitions[A]: 19; 
Other[B]: [Empty]; 
Total: 164. 

Treasury: Contract out; 
Direct conversions: 290; 
Streamlined competitions: 0; 
Full competitions[A]: 14; 
Other[B]: [Empty]; 
Total: 304. 

VA: Number of studies; 
Direct conversions: 0; 
Streamlined competitions: 0; 
Full competitions[A]: 1; 
Other[B]: [Empty]; 
Total: 1. 

VA: Total FTEs studied; 
Direct conversions: 0; 
Streamlined competitions: 0; 
Full competitions[A]: 270[C]; 
Other[B]: [Empty]; 
Total: 270. 

VA: In-house wins; 
Direct conversions: 0; 
Streamlined competitions: 0; 
Full competitions[A]: 0; 
Other[B]: [Empty]; 
Total: 0. 

VA: Contract out; 
Direct conversions: 0; 
Streamlined competitions: 0; 
Full competitions[A]: 120; 
Other[B]: [Empty]; 
Total: 120. 

Total: Number of studies; 
Direct conversions: 184; 
Streamlined competitions: 370; 
Full competitions[A]: 82; 
Other[B]: 92; 
Total: 728. 

Total: Total FTEs studied; 
Direct conversions: 1,882; 
Streamlined competitions: 4,354; 
Total: Full competitions[A]: 10,747; 
Other[B]: 620; 
Total: 17,603. 

Total: In-house wins; 
Direct conversions: 105; 
Streamlined competitions: 4,307; 
Full competitions[A]: 8,710; 
Other[B]: 236; 
Total: 13,358. 

Total: Contract out; 
Direct conversions: 1,777; 
Streamlined competitions: 37; 
Full competitions[A]: 1,653; 
Other[B]: 384; 
Total: 3,851. 

Source: GAO analysis of agency data.

Note: The Interior Department provided aggregated data for 2003. Over 
this 2-year period, 2002 and 2003, it studied 2,483 FTEs. On these, 968 
were retained in-house and 1,515 were contracted out.

In addition, VA did not initiate any studies in 2002.

[A] The winning MEO can require fewer FTEs than were originally 
performing the function.

[B] Includes various OMB approved approaches.

[C] This activity had 270 FTEs at the time the study was announced in 
1999. The Most Efficient Organization provided for 120 FTEs if the work 
was retained in-house. VA awarded the contract to the private sector in 
2003.

[End of table]

[End of section]

Appendix VI: Evolution of OMB's FAIR Act Guidance:

1998: 
* FAIR Act passed and required agencies to provide OMB an annual 
inventory of their FTE positions that are not considered inherently 
governmental; 
* The first submission of inventory data was 1999.

2001: 
* Directed agencies to also submit a separate report listing their 
inherently governmental positions.

2002: 
* Directed agencies to provide a single inventory submission that 
reflects both the agency's inherently governmental FTE positions and 
its commercial FTE positions. Once reviewed by OMB, agencies must 
provide a listing of their commercial FTE positions to the Congress 
and the public; 
* Instructed agencies that they should anticipate the possibility that 
after their list of inherently governmental positions has been 
reviewed, it too may be released to the public.

2003 (March): 
* Directed agencies to submit their FAIR Act inventory in two parts--
(1) a list of commercial activities performed by FTE civilian 
personnel and (2) a list of inherently governmental activities 
performed by FTE civilian personnel. After OMB reviews these lists, 
both will be released to the Congress and the public; 
* FTE civilian personnel. After OMB reviews these lists, both will be 
released to the Congress and the public; 
* Instructed agencies in developing their 2003 inventories to justify 
in writing all commercial positions that they consider as not being 
appropriate for private sector performance.

2003 (May): 
* Provided guidance for preparing inventories, directs agencies to 
annually submit inventories of (1) their commercial activities 
performed by government personnel, (2) inherently governmental 
activities performed by government personnel and (3) a summary report 
that identifies aggregate commercial and inherently governmental 
inventory data. (Contained in revised Circular A-76); 
* Instructed agencies to justify in writing all inherently 
governmental positions and all commercial positions classified as not 
appropriate for private sector performance. (Contained in revised 
Circular A-76).

Source: GAO analysis of OMB information. 

[End of table]

[End of section]

Appendix VII: OMB Scorecard Criteria for the Competitive 
Sourcing Initiative:

Yellow status: Agency has; 
* an OMB approved "yellow" competition plan to compete commercial 
activities available for competition; 
* completed one standard competition or publicly announced standard 
competitions that exceed the number of positions identified for 
competition in the agency's yellow competition plan; 
* in the past two quarters, completed 75% of streamlined competitions 
in a 90-day timeframe; and; 
* in the past two quarters, canceled less than 20% of publicly 
announced standard and streamlined competitions; 

Green status: Agency has; 
* an OMB approved "green" competition plan to compete commercial 
activities available for competition; 
* publicly announced standard competitions in accordance with the 
schedule outlined in the agency "green" competition plan; 
* since January 2001, completed at least 10 competitions (no minimum 
number of positions required per competition); 
* in the past year, completed 90% of all standard competitions in a 12-
month time frame; 
* in the past year, completed 95% of all streamlined competitions in a 
90-day timeframe; 
* in the past year, canceled fewer than 10% of publicly announced 
standard and streamlined competitions; and; 
* OMB-approved justifications for all categories of commercial 
activities exempt from competition. 

Source: OMB.

[End of table]

[End of section]

Appendix VIII: Strategic Approaches to Competitive Sourcing:

Several agencies used approaches that considered and balanced 
multiple agency interests within the competitive sourcing environment. 
The following discussion provides a more detailed description of these 
approaches.

HHS' National Institutes of Health Used Transparent Criteria to 
Identify Candidates for Competitive Sourcing:

NIH has developed a more strategic competitive sourcing approach that 
includes use of software and integration of the agency's human capital 
and strategic plans. According to NIH officials, in 2002, NIH appointed 
a Commercial Activities Steering Committee, comprised of 14 senior 
level officials, to work with NIH's 27 centers to determine the 
activities to be competed under its competitive sourcing program. The 
committee used FAIR Act inventory data, knowledge and experience, and a 
decision support software application that provides objective and 
analytical results. The software, enabled managers to respond to NIH-
developed questions related to mission effectiveness, human capital, as 
well as demand and risk.

Mission effectiveness: 
* Criticality of the function's role in relationship to NIH's mission; 
* Current state of tools and technology used by the function; 
* Current level of effectiveness of the processes used by the 
function; 
* Current level of customer satisfaction; 
* Current level of efficiency in the activity under study; 
* Expected cost to maintain an acceptable level of performance; 

Human capital: 
* Annual rate of staff turnover; 
* Number of staff performing the function; 
* Match between workforce skills and program/service function needs; 
* Percent of staff in function who are true masters of their art; 
* Percent of staff in function from underrepresented groups; 
* Openness of staff in the function toward conducting a cost 
comparison study; 

Demand and risk: 
* Current capacity relative to current demand for the function; 
* Long-term trend of demand for function; 
* Normative periodic fluctuation in demand for function (i.e. 
stability of demand); 
* Availability of function in the marketplace; 
* Risk to program integrity and control of sensitive information if 
the function were outsourced; 
* Degree of difficulty expected for NIH to manage the consequences of 
losing a cost competition. 

Source: GAO analysis of NIH data.

[End of table]

The software assigns weights to each response--using NIH-developed 
values--and generates scores for each activity under study. Committee 
officials then review the scores, considering factors such as (1) the 
activity's impact on NIH's mission, (2) costs, (3) socioeconomic 
impacts, and (4) potential advantages to competing the activity. NIH 
officials also stated that once a decision has been made to compete an 
activity, consideration might be given to re-engineering the applicable 
business process, whether it remains in-house or undergoes a public-
private competition. Once the Steering Committee has made its 
competitive sourcing decision, the Commercial Activities Review Team, 
with contractor assistance, implements the committee's decisions.

Further, in an effort to add rigor to its competitive sourcing process, 
NIH in a recent competition used a contractor to mitigate potential 
risks. NIH convened a panel of nine experts from the Georgia Institute 
of Technology to analyze and evaluate a request for proposal and its 
related performance work statement concerning real estate property 
management services at six installations--the estimated value of which 
exceed $100 million each year. In light of the risks it could encounter 
if the contract were deficient from a scope, technical, business, and/
or legal standpoint, NIH asked the panel to review the request for 
proposal developed in-house and determine whether or not the contract 
documents were properly conceived, logically organized, clearly 
written, and sufficiently complete and accurate. As a result of its 
analysis, the panel identified several areas where the request for 
proposal and performance work statement subjected NIH to risks. NIH 
officials reviewed the risk and made appropriate changes to these 
documents.

Finally, NIH officials sought advice and coordinated with HHS' Office 
of Strategic Management and Planning and Human Capital Office to link 
their competitive sourcing program to HHS' strategic and human capital 
plans.

Internal Revenue Service Uses Business Case Analysis and an 
Enterprisewide Approach:

According to an IRS official, IRS, a bureau within the Department of 
the Treasury, developed a strategic approach to competitive sourcing, 
using a business case analysis methodology used by leading industry 
firms to determine if commercial function(s) within a business division 
have the potential to create significant business process improvements 
along with a sizeable return on investment. Based on the results of the 
business case analyses, the Strategy and Resources Committee, headed by 
the Deputy Commissioner of Operations and Support decide to compete 
(public-private competition) or not compete the functions. According to 
IRS officials, this process enhances the opportunities to make smart 
business decisions aligned and supportive of the IRS Strategic Business 
Plan. IRS has focused its competitive sourcing efforts primarily on 
more strategic and enterprise-wide competitions because it has 
determined that this approach makes more economic sense than 
identifying candidates in smaller groups.

The official stated that the IRS's initial step for identifying the 
functions that will be considered to undergo a business case analysis 
is its review of the FAIR Act inventory, which has been merged with IRS 
personnel staffing database in a software application.[Footnote 32] 
This application, unique in terms of the agencies that we reviewed, 
crosswalks the FAIR Act inventory data with personnel staffing data to 
provide a comprehensive analysis of the various commercial function 
groupings across the IRS. After identifying these groupings, the 
bureau's subject matter experts and high-level managers along with 
hired contractors conduct business case analyses of these positions. As 
we reported, the business case analyses, which are completed in 
approximately 4 to 6 months,[Footnote 33] calculate the economic 
benefits of potential alternatives based on IRS responses to a number 
of critical questions:

* Is the function core to the mission?

* How much does the function cost?

* Is there potential to reduce cost and/or improve productivity by 
competing the function?

* How does the function fit into other current or planned strategic 
projects?

Based on the responses to these questions, and analyses of current 
operations, market research and an MEO design, IRS calculates and 
considers the economic benefits of each potential alternative and the 
upfront and recurring investments required to achieve and maintain 
efficiencies. IRS then makes a decision to compete or not compete 
based on weighted values assigned to IRS strategic business alignment, 
investment risks, return on investment, FAIR Act goal alignment, and 
alignment with President's Management Agenda goals. A key success 
factor to this approach is an expert validation of the assumptions used 
in the business case as well as the inclusion of significant direct and 
indirect costs associated with the function.

According to an IRS official, if competing a function makes the best 
business sense, IRS appoints a team leader who selects a team and 
obtains contractor support to plan and develop the performance work 
statement. Throughout the entire business case analysis and competitive 
sourcing lifecycle, the IRS Office of Competitive Sourcing is engaged 
and provides support to the various teams.

Officials from IRS' competitive sourcing program cited many benefits 
from the business case approach used during the preliminary planning 
stage: up-front consideration of major decision variables such as 
economics, market research and risk; involvement of top level 
management and leadership at the very early stages of the process; an 
opportunity to test candidate projects against strategic goals and 
performance improvement objectives; and a low investment requirement to 
qualify or reject an activity as a competitive sourcing project. 
According to an IRS official, while the time and cost to make a 
decision to compete or not to compete may seem excessive, once IRS 
conducts a public - private competition, they have confidence in the 
business case projected return-on-investment and an understanding of 
why conducting a particular set of business functions fits into the IRS 
strategic plan for business improvements and human capital goals.

Army's "Core-Non-Core" Approach for Classifying Positions:

The Army's experience in using a strategic approach to classify 
positions offers lessons for other agencies in identifying positions 
for competitive sourcing studies. The Army's attempt to focus on 
determining whether functions were core or non-core to the agency's 
mission found that such a distinction did not, by itself, adequately 
inform sourcing decisions. For example, the Army's core competency 
review showed that designating a function as "core" does not 
necessarily mean that in-house employees should perform a function or 
necessarily preclude competitive sourcing of the function. As we 
reported, Army officials found that other factors, such as risk and 
operational considerations, must also be considered.[Footnote 34]

The Army's effort assumed that all commercial positions were non-core 
to its mission and thus potential candidates for performance by the 
private sector or other government agencies. However, Army officials 
recognized that, in many instances, these "non-core" functions would 
require additional analysis to determine potential risks if the 
function were contracted. There are four categories of risk analysis: 
force management, operational, future challenges, and 
institutional.[Footnote 35] For example, Army officials determined that 
many medical functions, which are not classified as inherently 
governmental, could be considered core in some circumstances. Although 
medical functions typically do not require unique military knowledge or 
skills, medical activities in theater need to be performed by in-house 
personnel because contracting for medical support in host nations could 
present significant risk to U.S. armed forces. Consequently, the Army 
has determined that the in-theater medical mission is a critical 
element of the Army's ability to accomplish its core competencies. 
Other medical functions could be considered both core and non-core. For 
example, optical fabrication--the ability to produce 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, the same function performed in the United 
States is not core. The Army also determined that its casualty and 
mortuary affairs function is not a core or an inherently governmental 
function. However, national policy dictates that Army officials notify 
families of a casualty in-person.

Education's "One-ED" Approach Seeks to Integrate Competitive Sourcing 
with Other Initiatives:

In June 2002, the Department of Education launched, with OMB 
approval, an ambitious management reform known as the "One-ED" concept. 
One-ED seeks to transform departmental operations through 
the integration of human capital reform, competitive sourcing, and 
organizational restructuring.

As part of its One-ED approach the Department developed its FAIR Act 
inventory by first analyzing key processes. It then used the results of 
this process to restructure positions as either commercial or 
inherently governmental. As a result of this process, Education's 
reported inventory data have changed significantly in the past few 
years,[Footnote 36] and according to senior officials, the data are now 
more accurate and concise.

One-ED reviews cover selected elements of major departmental operations 
and are being implemented in four phases over a period of three years. 
In each phase, the Department (1) identifies specific business 
functions for review, (2) conducts a business case analysis of each 
function, and (3) decides whether to re-engineer the function or 
compete it with the private sector.

Phase I, which concluded in mid-2003, focused on agency-wide support 
functions, such as human resources, payment processing, and legal 
review. As a result, five agency-wide support functions will be 
competed with the private sector and four will be re-engineered and 
retained in-house. In making this decision, nine teams--comprised of 
approximately sixty employees knowledgeable about the function being 
studied and assisted by contractor personnel trained in developing 
business case analyses reviewed the functions and reported their 
findings to senior management. These teams considered such factors as 
the:

* skill sets and competencies required to perform the functions being 
reviewed,

* potential risks associated with outsourcing the position, and:

* relationship of the business function to the Department's strategic 
planning.

An Executive Management Team--chaired by the Deputy Secretary and 
staffed by senior Department officials--made the final determination 
using the information developed by the teams as well as other data. The 
Department initiated four standard competitions and one streamlined 
competition in fiscal year 2003. In addition, the Department is in the 
process of implementing proposals related to those business functions 
that were identified for in-house re-engineering. These projects were 
not completed at the time of our review. The Department's Office of 
Inspector General will report on its assessment on the implementation 
of the One-ED initiative in early 2004.

[End of section]

Appendix IX: Comments from the Department of Health & Human Services:

DEPARTMENT OF HEALTH & HUMAN SERVICES	
Office of Inspector General:

Washington, D.C. 20201:

FEB 24 2004:

Mr. William T. Woods:

Director, Acquisition and Sourcing Management: 
United States General Accounting Office 
Washington, D.C. 20548:

Dear Mr. Woods:

The Department has reviewed your draft report entitled, "Competitive 
Sourcing: Greater Emphasis Needed On Increasing Efficiency and 
Improving Performance," and has no comments at this time.

The Department provided several technical comments directly to your 
staff.

The Department appreciates the opportunity to comment on this draft 
report before its publication.

Sincerely,

Signed by: 

Dara Corrigan:

Acting Principal Deputy Inspector General:

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for General Accounting Office 
reports. OIG has not conducted an independent assessment of these 
comments and therefore expresses no opinion on them.

[End of section]

Appendix X: Comments from the Department of the Interior:

United States Department of the Interior:

OFFICE OF THE SECRETARY 
Washington, DC 20240:

FEB 20 2004:

Mr. William T. Woods:

Director, Acquisition and Sourcing Management:

United States General Accounting Office 
441 G Street, NW:

Washington, DC 20548:

Dear Mr. Woods:

Thank you for providing the United States Department of the Interior 
(DOI) with the opportunity to review and comment on the General 
Accounting Office's (GAO) draft report entitled, Competitive Sourcing. 
Greater Emphasis Needed on Increasing Efficiency and Improving 
Performance.

We concur with the report's conclusions and recommendations. However, 
we submit for your consideration, the following information for 
inclusion in the final report:

1. Page 6, Table 1: Overview of Civilian Agency Infrastructure 
Development; Interior section. Representatives from the Center for 
Competitive Sourcing Excellence and Department of the Interior bureaus 
and offices spent a considerable amount of time describing to GAO 
auditors significant actions taken in issuing policies, procedures, and 
guidance, and providing training and other resources, that we feel are 
not adequately reflected in Table 1.

Please find enclosed, a copy of the DOI Center for Competitive Sourcing 
Excellence's home page 
(http://www.doi.gov/perfmgt/competitivesourcing/). 
Guidance developed by the Center includes 
guides, success stories, Frequently Asked Questions, and other helpful 
information. We do not believe that the draft report's description of 
DOI accomplishments under Table 1's section on "Policies, procedures, 
and guidance" captures the Center's accomplishments in this area, and 
ask the first bullet be re-worded to state: Memoranda, Guides, labor-
management resolution regarding competitive sourcing, Frequently Asked 
Questions, and other guidance.

Related to this, we ask that the following be added to Table 1 under 
the "Training and other resources:":

* Hosted Government-wide competitive sourcing meetings and conferences; 
and:

* Launched website featuring Frequently Asked Questions and guidance.

2. We also wish to reiterate that Table 1's "Contract support" section 
identifies funding for support of the Center for Competitive Sourcing 
Excellence, and not bureau/office contractor expenditures made in 
support of competitive sourcing initiative.

We are preparing additional statistics to provide more detail on 
Interior information shown on the tables on pages 23 through 25 of the 
draft report, and will provide that as soon as it is available.

Thank you for providing us with the opportunity to comment on the draft 
report. If you have any questions regarding our response, please 
contact Jennings Wong, Center for Competitive Sourcing Excellence, on 
202-208-6704.

Sincerely,

Signed for: 

P. Lynn Scarlett:

Assistant Secretary - Policy, Management and Budget:

Enclosure:

[End of section]

Appendix XI: Comments from the Department of Veterans Affairs:

THE SECRETARY OF VETERANS AFFAIRS 
WASHINGTON:

February 18, 2004:

Mr. William T. Woods 
Director:

Acquisition and Sourcing Management Team: 
U. S. General Accounting Office:

441 G Street, N.W. 
Washington, DC 20548:

Dear Mr. Woods:

The Department of Veterans Affairs (VA) has reviewed your draft report, 
COMPETITIVE SOURCING: Greater Emphasis Needed On Increasing Efficiency 
and Improving Performance (GAO-04-367). VA supports the President's 
Management Agenda strategy under which agencies open commercial 
activities to competition with the private sector. However, as your 
report observes, legal impediments have precluded VA's pursuing its 
plan to implement the President's goals.

In August 2003, VA's General Counsel determined that VA's competitive 
sourcing activities were prohibited based on 38 U.S.C. 8110(a)(5) which 
precludes the expenditure of VA's appropriated health care funding for 
any studies that would 
compare the provision of commercial-type functions between VA employees 
and private sector employees in the absence of a specific appropriation 
for such comparisons. Accordingly, the Department terminated all 
competitive sourcing studies at that time.

This also affects VA's ability to implement earlier recommendations 
from two previous GAO reports, VA HEALTH CARE: Expanding Food Service 
Initiatives Could Save Millions (GAO/HERS-00-178) and VA HEALTH CARE: 
Consolidations and Competitive Sourcing of Laundry Service Could Save 
Millions, (GAO-00-61). Until the Department receives the requisite 
specific appropriation, VA will not be able to pursue the President's 
Management Agenda of Competitive Sourcing.

The enclosure provides technical corrections and clarifying edits. VA 
appreciates the opportunity to comment on your draft report.

Sincerely yours,

Signed by: 

Anthony J. Principi:

Enclosure:

[End of section]

FOOTNOTES

[1] The other four initiatives are strategic management of human 
capital, improved financial performance, expanded electronic 
government, and budget and performance integration.

[2] Full-time equivalent (FTE) is a measure of federal civilian 
employment. One FTE is equal to 1 work-year of 2,080 hours.

[3] OMB has updated this circular and handbook several times since 
1979. In May 2003, OMB released a revised Circular A-76, which 
supersedes previous versions of the handbook. Office of Management and 
Budget, Circular A-76 (Washington, D.C.: May 29, 2003).

[4] General Accounting Office, Results of A-76 Studies Over the Past 5 
Years, GAO-01-20 (Washington, D.C.: Dec. 7, 2000).

[5] Section 832, Floyd D. Spence National Defense Authorization Act for 
Fiscal Year 2001, P.L. 106-398 (Oct. 30, 2000).

[6] Commercial Activities Panel, Final Report: Improving the Sourcing 
Decisions of the Government (Washington, D.C.: Apr. 30, 2002).

[7] National Defense Authorization Act for Fiscal Year 2004, Section 
337, Public Law 108-136 (Nov. 24, 2003) directs the Secretary of 
Defense to implement a pilot program under which DOD organizations are 
provided incentives to re-engineer their operations in order to become 
high-performing organizations.

[8] General Accounting Office, High-Performing Organizations Forum: 
Metrics, Means, and Mechanisms for Achieving High-Performance in the 
21st Century Public Management Environment, GAO-04-343SP (Washington, 
D.C.: Feb. 13, 2004).

[9] P.L. 105-270 (Oct. 19, 1998).

[10] An "inherently governmental" activity is an activity that is so 
intimately related to the public interest as to mandate performance by 
government personnel. A "commercial" activity is a recurring service 
that could be performed by the private sector and is resourced, 
performed, and controlled by the agency through performance by 
government personnel, a contract, or a fee-for-service agreement.

[11] The 2002 FAIR Act inventories are the most currently available 
data for most federal agencies in our review.

[12] OMB defines a most efficient organization (MEO) as the staffing 
plan of the agency, developed to represent the agency's most efficient 
and cost-effective organization.

[13] The Directorate of Competitive Sourcing and Privatization, Office 
of the Deputy Under Secretary of Defense (Installations and 
Environment) has overall responsibility for developing these major 
departmental documents. The Deputy Under Secretary of Defense 
(Installations and Environment) is the designated Competitive Sourcing 
Official responsible for implementing OMB Circular A-76 within the 
department.

[14] See http://emissary.acq.osd.mil/inst/share.nsf.

[15] General Accounting Office, DOD Competitive Sourcing: Lessons 
Learned System Could Enhance A-76 Study Process, GAO/NSIAD-99-152 
(Washington, D.C.: July 21, 1999).

[16] The Department of Interior provided us only aggregated data for 
2002 and 2003. As a result, we were unable to segregate the data for 
these 2 years for inclusion in appendix V.

[17] While direct conversions were eliminated under the revised 
circular, OMB granted agencies permission to complete conversions 
initiated under the previous circular.

[18] These data cover studies completed through September 30, 2003. DOD 
studies may have started prior to 2002.

[19] Our prior work on this issue includes General Accounting Office, 
Competitive Contracting: The Understandability of FAIR Act Inventories 
Was Limited, GAO/GGD-00-68 (Washington, D.C.: Apr. 14, 2000); General 
Accounting Office, DOD Competitive Sourcing: More Consistency Needed in 
Identifying Commercial Activities, GAO/NSIAD-00-198 (Washington, D.C.: 
Aug. 11, 2000); and General Accounting Office, Competitive Sourcing: 
Challenges in Expanding A-76 Governmentwide, GAO-02-498T (Washington, 
D.C.: Mar. 6, 2002).

[20] General Accounting Office, Defense Management: DOD Faces 
Challenges Implementing Its Core Competency Approach and A-76 
Competitions, GAO-03-818 (Washington, D.C.: July 15, 2003).

[21] According to several agency officials, numerous pieces of 
legislation passed by Congress also have added to the complexity of 
implementing competitive sourcing. Before OMB repealed numerical FTE 
targets, the Congress, concerned with the arbitrary nature of such 
goals, passed legislation in January 2003 that applies to the 
Department of the Treasury, the U.S. Postal Service, and other 
entities, requiring competitive sourcing goals to be based on 
considered research and analysis. (Pub. L. 108-7 (Feb. 20, 2003) 
Division J, Section 647) Since OMB's release of its revised circular, 
Congress has passed several laws that impose limitations and reporting 
requirements concerning implementation of the program, e.g., section 
340 of the Department of the Interior and Related Agencies 
Appropriations Act for FY 2004 (Pub. L. 108-108 (Nov. 10, 2003)), 
section 8014 of the Department of Defense Appropriations Act for FY 
2004 (Pub. L. 108-87 (Sept. 30, 2003)), and most recently, section 647 
of the Consolidated Appropriations for FY 2004 (Pub. L. 108-199 (Jan. 
23, 2004)). Generally, these provisions require affected agencies to 
develop a most efficient and cost effective organization for activities 
or functions performed by more than ten government employees. 
Additionally, conversion to contractor performance must be supported by 
a determination that savings will equal or exceed the lesser of 10 
percent of government personnel costs or $10,000,000.

[22] General Accounting Office, Competitive Sourcing: Implementation 
Will Be Key to Success of New Circular A-76, GAO-03-943T (Washington, 
D.C: June 26, 2003).

[23] General Accounting Office, DOD Personnel: DOD Actions Needed to 
Strengthen Civilian Human Capital Strategic Planning and Integration 
with Military Personnel and Sourcing 
Decisions, GAO-03-475 (Washington, D.C: Mar. 28, 2003).

[24] General Accounting Office, Acquisition Workforce: Status of Agency 
Effort to Address Future Needs, GAO-03-55 (Washington, D.C.: Dec. 18, 
2002).

[25] GAO-03-943T.

[26] OMB has developed guidance (which it plans to issue in March 2004) 
for agencies to use in calculating the incremental "out of pocket" 
costs of competitions. OMB advises that it has developed this guidance 
to create greater consistency and understanding in agency reporting and 
to assist agencies in responding to reporting required by section 
647(b) of Division F of the Consolidated Appropriations, Fiscal Year 
2004. According to OMB agencies that have previously released cost 
figures on recent competitions may need to make adjustments to conform 
to this guidance.

[27] General Accounting Office, Defense Management: DOD Faces 
Challenges Implementing Its Core Competency Approach and A-76 
Competitions, GAO-03-318 (Washington, D.C.: July 15, 2003).

[28] Title 38 U.S.C. 8110 (a)(5) states: "Notwithstanding any other 
provision of this title or of any other law, funds appropriated for the 
department under the appropriation accounts for medical care, medical 
and prosthetic research, and medical administration and miscellaneous 
operating expenses may not be used for, and no employee compensated 
from such funds may carry out any activity in connection with, the 
conduct of any study comparing the cost of the provision by private 
contractors with the cost of the provision by the department of 
commercial or industrial products and services for the Veterans Health 
Administration unless such funds have been specifically appropriated 
for that purpose."

[29] Office of Management and Budget, Competitive Sourcing: Reasoned 
and Responsible Public-Private Competition (Washington, D.C.: Sept. 
2003).

[30] Section 832, Floyd D. Spence National Defense Authorization Act 
for Fiscal Year 2001, Pub. L. 106-398 (Oct. 30, 2000).

[31] Commercial Activities Panel, Final Report: Improving the Sourcing 
Decisions of the Government (Washington, D.C.: Apr. 30, 2002).

[32] In its report The Accuracy of the Federal Activities Inventory Can 
Be Improved (Reference Number: 2003-10-181, Washington, D.C.: Aug. 
2003), Treasury's Office of the Inspector General found that overall 
the IRS needs to improve its compliance with FAIR Act requirements and 
recommended that the Director, Competitive Sourcing Program provide the 
business units with specific guidance for categorizing activities as 
commercial or inherently governmental, including supplemental 
definitions to assist business units in using Function Codes properly 
and consistently IRS-wide. Other recommendations included the 
development of an IRS -wide process for assembling the FAIR Act 
inventory and a methodology for properly calculating FTEs. 

[33] According to an IRS official, the average contractor cost to 
support business case studies ranges from $150,000 to $350,000, 
depending on the number of FTE positions analyzed.

[34] GAO-03-818.

[35] 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.

[36] In the 2000 inventory, department employees were placed into 225 
functional categories; today, 65 percent of the Department of Education 
employees fall into only 15 functional categories.

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