Defense Outsourcing: OMB Circular A-76 Policy And Options for Congress -- Proceedings of a CRS Seminar

Defense Outsourcing: OMB Circular A-76 Policy And Options for Congress -- Proceedings of a CRS Seminar

Order Code RL30574
CRS Report for Congress
Received through the CRS Web
Defense Outsourcing: OMB Circular A-76 Policy
And Options for Congress —
Proceedings of a CRS Seminar

May 30, 2000
(name redacted)
Analyst in National Defense
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

Defense Outsourcing: OMB Circular A-76 Policy and
Options for Congress — Proceedings of a CRS Seminar
Summary
On April 13, 2000, the Congressional Research Service sponsored a policy
seminar, for Members of Congress and staff, entitled “Defense Outsourcing: OMB
Circular A-76 and Options for Congress.” This report summarizes that seminar.
The Office of Management and Budget (OMB) Circular A-76 has long been
viewed, by some, as a management reform tool to facilitate government outsourcing.
The policy of transferring to the private sector functions performed by government
employees dates back to the Eisenhower Administration. In 1966, the effort was
codified through OMB Circular A-76. Executive branch agencies, like the
Department of Defense (DOD), have relied on the Circular’s guidelines and
procedures for determining whether commercial activities should be performed by the
private sector, or by government sources. Since the end of the Cold War, DOD has
substantially reduced its force structure; however, defense operations and support
costs have not diminished proportionately to the size of the force. As a result, DOD
has sought to reduce spending to achieve greater savings to finance weapons and
military equipment modernization. Without additional base realignment and closures
(BRAC), DOD seeks savings through a greater reliance on managed competitions
through application of OMB Circular A-76.
This seminar focused on DOD’s efforts to encourage greater use of the Circular
as a mechanism for increased competition in the marketplace. The seminar panel
comprised a senior DOD official, the President and Chief Executive Officer of a
defense trade association, and a defense policy analyst from the largest national labor
organization serving federal employees. In preparation for the seminar, each panelist
was asked to address three questions regarding Circular policy:
1)
Does the use of OMB Circular A-76, in contracting DOD activities, save
money? Are there performance metrics in place to determine what the savings
really are?
2)
Is OMB Circular A-76 the only viable option to reduce costs?
3)
How will outsourcing affect U.S. national security and the U.S. military’s war-
fighting capability?
In their presentations and discussions, every member of the panel agreed that
the Clinton Administration has sought to revise OMB Circular A-76 as a way to
reduce government costs and increase the government’s efficiency. Panelists praised
certain aspects of OMB Circular A-76 because of its organization and level of detail.
However, there was a spirited debate between panelists and seminar attendees on the
inherent problems with the Circular, how to fix them, and other options to reduce
costs. The panel viewed OMB Circular A-76 policy and process as flawed, and
described the process as onerous and adversarial. Panelists spoke forcefully about the
urgent need to change the way that the government conducts its business; in many
respects, the seminar presentations and ensuing discussions extended beyond OMB
Circular A-76; they encompassed the future direction of competitive outsourcing
within DOD.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Basic Themes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Does Use Of OMB Circular A-76, In DOD Contracting Activities, Save Money?
Are There Performance Metrics In Place To Determine What The Savings
Really Are? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Is OMB Circular A-76 The Only Viable Option To Reduce Costs? . . . . . . 5
How Will Outsourcing Affect U.S. National Security And The U.S. Military’s
War-fighting Capability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Defense Outsourcing: The OMB Circular
A-76 Policy and Options for Congress —
Proceedings of a CRS Seminar
Introduction
On April 13, 2000, the Congressional Research Service, sponsored a seminar
entitled “Defense Outsourcing: The OMB Circular A-761 Policy and Options for
Congress,” for Members of Congress and professional staff. Outsourcing through the
Office of Personnel Management (OMB) Circular A-76 has been viewed, by some,
as a management reform tool to facilitate government outsourcing and privatization.
The policy of transferring to the private sector functions performed by
government employees dates back to the Eisenhower Administration. The policy was
developed, over time, in order provide a solid framework for OMB Circular A-76.
OMB Circular A-76 was codified in 1966, revised in 1983 and 1999. Executive
branch agencies, like the Department of Defense (DOD), have relied on the Circular’s
guidance and procedures for determining whether commercial activities should be
performed by the private business sector, or by government sources. Since the end
of the Cold War, DOD has substantially reduced its force structure; however, defense
operations and support costs have not diminished proportionately to the size of the
force. As a result, DOD must further reduce spending to achieve greater savings to
finance weapons and military equipment modernization. Without additional base
realignment and closures (BRAC), DOD sought savings through a greater reliance
on managed competitions through OMB Circular A-76.
OMB Circular A-76 provides an analytical framework on which the government
bases its decision on who is best to perform the work. The Circular outlines a very
formal, intricate, and often lengthy process for conducting managed competitions to
facilitate the outsourcing of federal government activities considered commercial, or
not inherently governmental. DOD has encouraged greater use of OMB Circular A-
76 as a mechanism for increased competition for federal contracts and has placed
considerable emphasis on competitive sourcing programs.
1 U.S. Executive Office of the President, Office of Management and Budget, Performance of
Commercial Activities, Circular No. A-76 (Washington: Aug. 4, 1983, rev. June 14, 1999)
Available on the internet at [http://www.whitehouse.gov/OMB/circulars/a076/a076.html].
For further discussion of OMB Circular A-76, see CRS Report RL30392, Defense
Outsourcing: OMB Circular A-76 Policy, by (name redacted).

CRS-2
The defense seminar panel was composed of a senior DOD official, the
President and Chief Executive Officer of a defense trade association, and a defense
policy analyst and procurement specialist, representing the largest national labor
organization serving Federal employees. Panelists presented their views and engaged
in discussion with congressional and legislative branch staff members.
Seminar Panelists
Panelists
Title
Joseph K. Sikes
Director, Competitive Sourcing and Privatization, Office of
the Deputy Under Secretary of Defense (Installations)
Richard Hearney
President and CEO, Business Executives for
National Security
Wiley Pearson
Defense Policy Analyst and Procurement Specialist,
American Federation of Government Employees
(name redacted)
Moderator
Questions Addressed
At The Seminar:
1. Does use of OMB Circular A-76, in contracting
DOD activities, save money? Are there
performance metrics in place to determine what
the savings really are?
2. Is OMB Circular A-76 the only viable option to
reduce costs?
3. How will outsourcing affect U.S. national
security and the U.S. military’s war-fighting
capability?
Basic Themes
Every member of the panel agreed that the Clinton Administration has sought to
revise OMB Circular A-76 as a way to reduce government costs and increase
efficiency. In their presentations and discussions, panelists praised certain aspects of
OMB Circular A-76 because of its organization and level of detail (an OMB policy
memorandum, accompanied by a supplemental handbook, outlines the process for the
government as well as the private sector.) This level of detail helps all parties to
understand and follow the rules.

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No one on the panel recommended completely abandoning use of the Circular.
There was a spirited debate, however, between panelists and seminar participants, on
the inherent problems with the Circular, how to fix them, and other options to reduce
costs. The panel viewed OMB Circular A-76 policy and process as flawed, and
described the process as onerous and adversarial. The panelists, three retired military
officers, spoke forcefully about the urgent need to change the way that the
government conducts its business; in many respects, the seminar presentations and
ensuing discussions extended beyond OMB Circular A-76; they encompassed the
future direction of competitive outsourcing within DOD.
Does Use Of OMB Circular A-76, In DOD Contracting Activities,
Save Money? Are There Performance Metrics In Place To
Determine What The Savings Really Are?
Panelists expressed strong disagreement over whether the use of OMB Circular
A-76, in DOD contracting activities, saves money. Every panelist expressed the
opinion that DOD did not know, and could not prove, whether the policy saved
money. Some panelists cited published government audits of recent outsourcing
competitions citing costs savings achieved through use of OMB Circular A-76,
although one panelist simply stated “And I would agree that it’s really hard to figure
out what those savings are.” Another panelist reported that since 1988, DOD has
failed to release any information on the impact of downsizing on displaced federal
workers. He firmly believed that any savings realized were achieved by undercutting
the wages and benefits of federal employees. Citing a recent General Accounting
Office study to support his premise, the panelist stated that DOD did not consider the
long-term costs of downsizing the workforce — to include the administrative costs
of personnel separations (including payment of lump sum leave balances and
retirement benefits) — when calculating the savings gained from managed
competitions. Further, the panelist stated that, in his opinion, most federal
government work performed by contractors is never subjected to the OMB Circular
A-76 process, and that most federal government contracts are awarded without
benefit of public-private competitions.
All panelists agreed that no appropriate performance metrics, or standards of
measurement, were in place to measure savings; they agreed that DOD did not have
a tracking mechanism in place to determine how much money is saved over the total
life cycle of a defense procurement contract. All expressed the view that the
government was generally ill-equipped to perform accurate cost-accounting
procedures, and did not fully know the actual defense procurement contract costs.
One panelist opined that such contract costs could increase for a variety of reasons.
He stated that the costs rise, in some cases, because DOD has not accurately defined
what work needs to be performed, or that DOD later revises the contract’s stated
mission or purpose. Another panelist offered that the OMB Circular A-76 process
is a “cost comparison study,” and the policy only compares contract costs, not what
would necessarily represent the long-term “best value” to the federal government.
Still, another panelist believed that the Federal Activities Inventory Reform (FAIR)

CRS-4
Act2 does require federal agencies to conduct an inventory of work performed by
federal employees, but did not require that contractors conduct a similar inventory of
work, even though, in his opinion, approximately two-thirds of the functions of the
federal government are estimated to be contracted out.
OMB Circular A-76 requires that cost comparison studies (proposals made by
the government or the private sector for federal contracts) include a 12% across-the-
board, overhead rate.3 Panelists disagreed over the use of a 12% rate. Some
panelists believed that the rate was too low, and that the low overhead rate gives the
government an automatic advantage in formulating lower bids. The administrative
and overhead rate varies by industry; for example, the information technology industry
uses a 40% overhead rate as a standard rate. One panelist expressed the opinion that
a flat 12% rate on overhead is a little bit suspect. We ought to have a little bit
more refinement and be able to bear down and find out what those actual costs are
... have a good solid competition and then a good accounting both for the
government, if they win a competition, or for the private sector, if they win a
competition .... that the figure of 12% administrative/overhead costs was an
arbitrary number.
Another panelist, in response, explained that the 12% rate was a compromise rate;
that it was the result of a long-fought negotiation between the government and the
private sector. He offered this assessment:
The problem is, when you try to figure out what the right number is, immediately
you re-engage with everybody because it’s being skewed to the benefit of whoever
it is that thinks they’re being disadvantaged. And so what would happen is we’re
going around in circles. We do need to figure out how to do that ... There should
be an honest broker that could sit there and figure out what the exact, right amount
was.
Panelists were in agreement that the OMB Circular A-76 process costs too much
and takes too long to complete. One recent cost-comparison study conducted by the
U.S. Army revealed that most single function competitions take about two years to
complete, while multifunction competitions take about four years to complete. This
length of time was viewed as unacceptable, and not in line with current private sector
business practices. One panelist asserted that the decision cycle time (length of time
it takes to make a business decision) needed to be reduced, and that the decision
making process needed acceleration. He made the comparison between the decision
process in the private sector to that within DOD:
2 The Federal Activities Inventory Reform Act of 1998 (FAIR), Public Law 105-270,
requires each federal agency to submit annually, by June 30, to the Office of Management and
Budget, an inventory of all commercial activities performed by in-house federal employees.
For further discussion of the FAIR Act, see CRS Report RS20440, Fair Act Inventory of
Commercial Activities Performed In-House: Federal Personnel Agencies, by (name reda
cted).
3 For a discussion of overhead rates, see Part II - Preparing the In-house and Contract Cost
Estimates. OMB Circular A-76 Revised Supplemental Handbook.

CRS-5
I’ve been talking to people out in Silicon Valley and they talk about moving at
internet speed. And they made the comparison about decision processes in DOD,
in particular. And they said by the time DOD makes a decision, we have come up
with an idea, developed the idea, formed a company, gone public, sold the
company, and are working on the next idea and DOD still has not made a decision.
I think we have to find ways to try to accelerate the process a bit if at all possible.
Is OMB Circular A-76 The Only Viable Option To Reduce Costs?
Within OMB Circular A-76 regulations, DOD may authorize cost comparison
waivers (waiving the need to conduct a competition) and direct conversions to, or
from, the in-house government entity to a private sector contract.4 Panelists were
in agreement that the standard OMB Circular A-76 process was not the only option
available to DOD. They proposed options considered viable within, as well as
outside, the boundaries of current policy.
Within current policy, government functions that involve 10 or fewer full-time
equivalents (FTE)5 may be converted without a cost comparison study, if the
contracting officer determines that potential contract proposals would provide
required levels of service quality at fair and reasonable prices. Functions that involve
11 or more FTEs may be converted without cost comparison study, if fair and
reasonable prices can be obtained through competitive award, and all directly affected
federal employees serving on permanent appointments are reassigned to other
comparable federal positions for which they are qualified.
A second option offered by a panelist would be to raise the threshold of the
number of positions required for competition, currently set at 11, by nearly tenfold,
so that about 80% of the anticipated outsourcing studies would be exempt from
Circular requirements. He suggested that by raising the threshold, DOD would
conduct larger cost comparison studies, and could benefit from economies of scale
not achieved with the smaller studies. He offered this assessment:
You might compete whole bases or regions. The Defense Science Board, I believe,
in 1996 recommended that each service identify two bases and enter into a pilot
program and see how it works. But we need a catalyst to get this going, and a
pilot program may very well be that.
A third option would be to award contracts based on the best value to the
government, not just based on initial purchase price, and establish performance
4 U.S. Executive Office of the President, Office of Management and Budget, Performance of
Commercial Activities - Part I, Section E. Agency Cost Comparison Waivers, Circular No.
A-76 (Washington: Aug. 4, 1983, rev. June 14, 1999)
5 The term FTE represents a statistical computation, including all time worked, and is used
for budgetary and staffing projections. The computation bears minimal relation to the number
of actual personnel, because it includes hours worked on full-time, part-time, and intermittent
schedules. It also includes hours worked by all personnel, regardless of their length of service.
For further discussion, please refer to CRS Issue Brief 10024, Federal Civilian Employees
and the FY2000 Budget, by Sharon Gressle.

CRS-6
incentives and/or penalties to the contract winner. The panelist suggested that again
DOD could authorize the use of pilot or demonstration projects, on a smaller level,
to provide a testing ground for the “best value” concept.
Outside of OMB Circular A-76, some panelists raised a newer initiative, first
introduced by the U.S. Navy, called strategic sourcing. Strategic sourcing is
considered to be a more broad-based alternative to OMB Circular A-76. The Navy
sought to review all of its functions, not just those commercial in nature, to develop
a plan to streamline the entire organization. The Navy, reportedly the first federal
group to begin development on a strategic sourcing guide and a strategic sourcing
managerial support center, has stated that it could reorganize its workforce and
workflow so that the projected 64,000 commercial jobs targeted for managed
competitions could be eliminated in-house, avoiding managed competition, and still
produce the projected savings. One panelist supported the idea, and offered the
following comment:
...instead of sitting there and trying to argue about which positions were
commercial and then trying to figure out how to package them into competitions,
we should be looking at what we do - what the functions are. Not just limiting it
to basically the third of the civilian workforce that was stamped as commercial,
but looking at our whole workforce, military and civilian, what functions they do
and what’s the best way to provide that function.
However, among other panelists, strategic sourcing was viewed as less well-defined
than OMB Circular A-76, needing more fine-tuning and clarification.
How Will Outsourcing Affect U.S. National Security And The U.S.
Military’s War-fighting Capability?
Panelists were asked to consider this question, based on their practical and
operational knowledge, as well as their past careers as active-duty military officers,
some with military conflict experience. One panelist expressed the opinion that
outsourcing adversely affected U.S. national security because it “disrupted and
demoralized” the federal civilian workforce. Given his observation that “72% of the
defense workforce, right now, is at least 41 years old,” he challenged federal
managers to re-shape and rejuvenate the federal civilian workforce by ensuring that
federal employees are “motivated, stable, competent, and competitively paid.”
Stating that the national defense was indeed threatened by “throwing public
employees out on the street,” he argued that the real question is “how do we recruit,
train, and retain the federal workforce needed for the nation’s security in the 21st
century?” In his opinion, the current debate over outsourcing is a distraction away
from a more important debate over weapon system acquisition; he felt that
policymakers should focus on “how do we prepare and equip the armed forces, in a
very new, different, and challenging post-Cold War mission?”
Another panelist offered that, during his military combat experience, contractors
were an integral part of combat support activities on the battlefield. He urged that
DOD spend the time now to revise competitive outsourcing strategies, rather than
wait until the United States is engaged in a major conflict. In his opinion, the use of

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private sector contractors had a positive effect on national security, and enhanced the
military’s war-fighting capability.
One panelist viewed the introduction of H.R. 3766, the Truth, Responsibility and
Accountability in Contracting Act (TRAC), as a constructive way of addressing
perceived inequities in the government’s outsourcing and privatization policy. The
bill was introduced on February 29, 2000 by Representative Albert Wynn, and
referred to the House Government Reform Committee. TRAC would impose a
temporary suspension on new contracting activities until some corrective action is
taken, and require federal agencies to monitor contract costs and savings from
outsourcing initiatives. The bill would prevent agencies from outsourcing without
benefit of public-private competitions, and allow agencies to hire additional federal
employees, in some circumstances. It would require federal agencies to develop a
centralized contracting reporting system, and study government outsourcing’s effect
on wages and benefits.

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