This is the accessible text file for GAO report number GAO-03-391r 
entitled 'Proposed Revisions to OMB Circular A-76' which was released 
on January 16, 2003.



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January 16, 2003:



The Honorable Mitchell E. Daniels, Jr.



Director, Office of Management:



and Budget:



Subject: Proposed Revisions to OMB Circular A-76:



Dear Mr. Daniels:



I want to recognize the considerable effort expended by you and your 

team on the proposed revision to Office of Management and Budget (OMB) 

Circular A-76, which prescribes policies and procedures agencies must 

use when considering the transfer of commercial activities between the 

public and private sectors. The proposed revision was issued for public 

comment on November 19, 2002, and I understand that OMB has received 

hundreds of comments on the proposal. As you consider these comments, I 

want to provide GAO’s assessment of the proposed changes, as well as 

our recommendations for how the proposal could be improved.



The proposed revision in many ways is consistent with the sourcing 

principles and recommendations adopted by the Commercial Activities 

Panel, which I chaired, in its April 30, 2002, report.[Footnote 1] In 

particular, the proposal stresses the use of competition in making 

sourcing decisions and, through reliance on procedures contained in the 

Federal Acquisition Regulation (FAR), should result in a more 

transparent, expeditious, fair, and consistently applied competitive 

process. The proposal should promote sourcing decisions that reflect 

the best overall value to the agencies, rather than just the lowest 

cost. Importantly, the proposed revision also should result in greater 

accountability for performance, regardless of the service provider 

selected.



There are several areas, however, where the proposed revisions to the 

Circular are not consistent with the principles or recommendations of 

the Commercial Activities Panel. Specifically, these include the 

absence of a link between sourcing policy and agency missions, 

unnecessarily complicated source selection procedures, certain 

unrealistic time frames, and insufficient guidance on calculating 

savings. Each of these areas is discussed in detail below, together 

with recommendations intended to align the proposal more fully with the 

views expressed by the Panel.



Emphasize Sourcing As a Strategic Issue:



The first of the 10 sourcing principles unanimously adopted by the 

Panel is that federal sourcing policy should support agency missions, 

goals, and objectives. In other words, sourcing policy is not just 

about choosing among potential service providers. Rather, an agency’s 

sourcing policy should be viewed as part of an overall strategy for how 

best to accomplish the mission of the agency, including how it conducts 

human capital planning. The current A-76 Revised Supplemental Handbook 

reflects this idea by pointing out that in focusing on core mission 

competencies and service requirements, agencies should consider a wide 

range of options, including restructuring, privatization, devolution of 

activities to state and local governments, or the termination of 

obsolete functions. To this list of options, the Panel recommended 

adding high-performing organizations and public-private partnerships. 

The proposed revision, however, does not list these or other 

options,[Footnote 2] nor does it otherwise stress the importance of 

considering alternative approaches to accomplishing agency missions. 

Given that many of these options can result in improved efficiency and 

enhanced performance, we recommend that the Circular continue to 

encourage agencies to consider these and other alternatives to A-76.



Source Selection Issues:



The Panel recommended that public-private competitions be conducted 

using the framework of the FAR, with appropriate changes to accommodate 

public-sector proposals. For the most part, the proposed revised 

Circular would implement this recommendation in a manner consistent 

with the Panel’s principles. We have concerns, however, regarding the 

source selection evaluation approaches contained in the proposal.



The proposed revised Circular provides for two different types of 

evaluation approaches--”integrated” and “phased”--to address cases 

where an agency may wish to make trade-offs between cost and higher 

performance levels in selecting a service provider. The trade-off 

concept is fully consistent with the Panel’s call for a process that 

considers both quality and cost factors and is used routinely 

throughout the government in FAR-based acquisitions. In the proposed 

integrated approach, however, the revised Circular would require that 

decisions to select other than the lowest cost provider be supported by 

a “quantifiable rationale.” While it is certainly reasonable to expect 

procurement officials to articulate the rationale for their decisions-

-and the FAR requires that they do so--there is no requirement in the 

FAR that the rationale be “quantifiable.” It is not clear what is 

intended by the use of the term “quantifiable,” or what the agencies 

would need to do beyond what the FAR currently requires to ensure that 

trade-off decisions are justified and adequately explained. We 

recommend that the revised Circular include additional guidance 

concerning any requirement that an agency’s trade-off decision be 

“quantifiable.”:



In the phased evaluation approach, an agency would evaluate the 

technical merit of tenders and offers in the first phase, adjust its 

required performance standards as needed, and then select the lowest-

cost provider in the second phase. This approach raises two issues. 

First, in the technical evaluation phase, the agency essentially would 

conduct a cost-benefit analysis for each instance in which a proposed 

performance standard differed from a solicitation requirement. This 

process, which does not appear to be based on the FAR, likely would be 

quite burdensome both for the offerors, who must assign specific dollar 

values to each differing level of performance, and for the agencies in 

evaluating the costs and benefits of differing performance levels for 

perhaps scores of discrete performance standards. Second, should it 

decide that an offered performance standard is desirable, an agency 

would be required to advise all competitors of its revised requirements 

and allow the submission of revised proposals or tenders. Particularly 

for some of the more complex requirements, this process could serve as 

a disincentive to innovation should offerors become reluctant to 

propose improved ways to enhance contract performance out of fear that 

their proposed approaches will be shared with their competitors. We 

recommend that the phased evaluation approach be revised to simplify 

the process and ensure the protection of certain proprietary and highly 

competition-sensitive information.



Unrealistic Time Frames:



In the course of its review, the Commercial Activities Panel repeatedly 

heard complaints from all sides about the length of time required to 

conduct A-76 cost comparisons, and there is an obvious effort in the 

proposed revision to expedite the process. The proposal would establish 

a 12-month limit for completing the standard competition process and, 

within that time frame, a 4-month limit for source selection. In our 

view, however, the proposed required time frames are unrealistic. Over 

the last 5 years, the average time to complete a cost comparison 

process in the Department of Defense was 25 months (excluding appeals 

and protests). Source selection alone averaged 7 months. While these 

averages demonstrate the need to expedite the process, we question 

whether simply imposing aggressive, fixed deadlines is the answer. 

Rather, additional training, technical resources, or other support for 

agency officials in preparing for and participating in public-private 

competitions may be needed. We recommend that the time frames be 

revised to be more realistic (perhaps 15 to 18 months overall) and that 

OMB ensure that agencies provide sufficient resources to comply with 

the new A-76 requirements.



Business Case Direct Conversions:



The Commercial Activities Panel strongly supported continued emphasis 

on competition in determining whether the public or the private sectors 

should perform commercial services. In fact, the Panel said that direct 

conversions from one sector to another without the benefit of 

competition generally should occur only where the number of affected 

positions is de minimis (10 or fewer full-time equivalent [FTE] 

positions). For the most part, the proposed revision of A-76 would 

maintain current policy and permit direct conversions only in limited 

circumstances, such as for direct research and development, for 

national defense or intelligence security with the prior approval of 

OMB, or for “small activities” (i.e., 10 or fewer civilian employees). 

The proposed revision would expand the list of permissible direct 

conversions, however, to include activities performed by up to 50 

employees based on a “business case analysis.” This analysis, which is 

essentially the same as the streamlined cost comparisons currently 

permitted for activities involving up to 65 positions, would compare 

the estimated cost of agency performance with the lowest-priced 

existing contract for a similar workload to determine whether to 

directly convert the function.



We have two concerns about the proposed business case direct 

conversions. First,

changing the characterization of the process from a streamlined cost 

comparison to a business case direct conversion sends an unfortunate 

signal that the administration is attempting to increase the number of 

direct conversions. As you know, this is a particularly sensitive 

matter for federal employees, whose trust in the objectivity and 

fairness of the system will be critical to the success of the 

administration’s competitive sourcing initiative. Second, the cost 

comparison would continue to be based upon an agency’s current 

organization, with no opportunity for developing a “most efficient 

organization” (MEO). We recommend that the proposed revision require 

that any streamlined cost comparison be based on a reliable estimate of 

the efficiencies likely to be realized through the creation of an in-

house MEO. Should the cost comparison indicate that continued agency 

performance of the function would be more advantageous to the 

government than other alternatives, the agency should be required to 

develop and implement the MEO.



Lack of Guidance on Calculating Savings:



The Circular requires that agencies report the savings that accrue from 

A-76 competitions. The Circular does not provide any guidance, however, 

on how savings are to be calculated. Our work examining the use of 

Circular A-76 in the Department of Defense has shown a lack of 

consistency among and even within the military services in how they 

calculate savings. While our analyses indicate that significant savings 

are likely from many of these competitions, we have not been able to 

quantify the precise level of savings because of the lack of good 

baseline data and other limitations. Calculation of savings is an area 

that requires additional OMB guidance.



Implementation Is Key:



Finally, the critical issue for all affected parties is how the 

government’s sourcing policies are implemented. In this regard, one of 

the Panel’s sourcing principles was that the government should avoid 

arbitrary numerical or FTE goals. This principle is based on the 

concept that the success of government programs should be measured by 

the results achieved in terms of providing value to the taxpayer, not 

the size of the in-house or contractor workforce. Although the proposed 

revised Circular contains no numerical targets or goals for competitive 

sourcing, this has been a controversial area in the past. In our view, 

the administration needs to avoid arbitrary targets or quotas, or any 

goal that is not based on considered research and analysis.



With the changes specified above, the revised Circular A-76 would be 

more consistent with the recommendations of the Commercial Activities 

Panel and with the sourcing principles the Panel adopted. Please 

contact me at (202) 512-5500 or Bill Woods, Director, Acquisition and 

Sourcing Management, if you would like further discussion of these 

issues. Bill can be reached at (202) 512-8214 or at Woodsw@gao.gov.



Sincerely yours,



David M. Walker:



Comptroller General of the United States:



Signed by David M. Walker



cc: Mark Everson:



Deputy Director for Management:



Angela Styles:



Administrator, Office of:



Federal Procurement Policy:



(120191):



FOOTNOTES



[1] Commercial Activities Panel, Improving the Sourcing Decisions of 

the Government (Washington, D.C.: April 30, 2002).



[2] In fact, the proposed Circular discourages public-private 

partnerships by prohibiting agencies from entering into new contracts 

when creating “most efficient organizations.”



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