Competition is the driving force in the American economy. It forces organizations to improve quality, reduce costs, and focus on customers' needs. Continuously spurred by these forces, American firms are now global leaders in innovation, cost performance, and technological development.
Competition offers these same benefits to DoD and plays a critical role in our reform effort. Our bases and forces require support in a number of service areas. Buildings must be maintained, equipment must be repaired, checks must be written. Many of these activities are now performed by uniformed personnel or civilian government workers. Often, there is no reason why this work cannot be performed by the private sector. In such cases, following the example of America's leading firms, DoD will benefit greatly by introducing the dynamic forces of competition into the procurement of support activities.
Competition between the public and private sectors is not new. We have conducted such competitions in the past, typically saving at least 20 percent of the contract cost as a result. Many states and local communities have also begun using competition to take advantage of its benefits. They too have found that competition improves services and lowers cost. As the growing body of experience demonstrates, competition leads both the public and private sectors to find new ways to improve service and lower cost.
We do not seek to replace government workers with private sector contractors. Our DoD civilian employees are dedicated, skilled, and hardworking. We fully expect and our own experience has shown that the government sector will win a significant portion of these competitions. But when it does, it will be because it provides the best service at the best price. The Department will benefit, as will the American taxpayer and our fighting forces.
To ensure that competitions between the public and private sectors occur on a level playing field, the government has established a formal process, outlined in Office of Management and Budget Circular A-76 and its revised Supplement (see box on A-76). The Supplement sets forth detailed, "how-to" procedures for conducting cost comparisons to determine whether commercial activities should be performed in-house, or by the private sector. The process mandates competition between the government organization currently doing the work and the private sector. As part of the process, the public sector organization is able to re-form into a "Most Efficient Organization" to compete. In order to win a competition, a private sector bid must be at least ten percent lower than the public sector bid.
Highlights - Streamlining Through Competition
- DoD will increasingly rely on the competitive powers of the marketplace to help us become more efficient. This means:
- By 1999, DoD will evaluate our entire military and civilian workforce to identify which functions are commercial in nature and could be opened up for competition under the A-76 process. In particular, the Department is looking at competing the following functions: civilian pay, military retiree and annuitant pay, personnel services, disposal of surplus property, national stockpile sales, management of leased property, and drug testing laboratories.
- DoD will continue to pursue public-private competitions for depot maintenance work to the full extent allowed by law.
Office of Management and Budget Circular A-76
The Office of Management and Budget (OMB) Circular A-76, "Performance of Commercial Activities," has its roots in the Eisenhower Administration with Budget Bulletin 55-4, January 1955, which stated: "It is the general policy of the Federal Government that it will not start or carry on any commercial activity to provide a service or product for its own use if such product or service can be procured from private enterprise through ordinary business channels."
OMB Circular A-76 was first published in March 1966, with subsequent updates in 1979 and 1983. It continued the Federal Government's preference of relying on the private enterprise system to supply its commercial needs. It also allows the government provider the opportunity to reengineer its activities to form a "Most Efficient Organization" that can best compete with the private sector.
In March 1996, OMB revised the A-76 process providing for streamlined cost comparisons, fixed overhead rate for in-house cost estimates, and several technical changes to standardize work so that we can compare like units to each other. This given amount of work could be done by any mix of full-time and part-time personnel. By describing the work in standard terms, i.e., Full Time Equivalents (FTEs), a fair comparison can be made. FTEs are equal to one work-year for a given job. We compete based on FTEs instead of positions in order to standardize the amount of work we expect to be accomplished by the given job and to control for work that is regularly done part-time or with overtime.
From 1979 to 1996, DoD competed functions involving over 90,000 Full Time Equivalents (FTEs) under the A-76 rules. As a result of these competitions, DoD now saves $1.5 billion a year. About half of these competitions were won by government organizations. The competitions have reduced the annual operating costs of the functions involved by about 30 percent. FY 1983 represented the historical high point with functions involving over 10,000 FTEs competed. This past year, DoD initiated studies of functions involving over 34,000 FTEs, which will be completed between FY 1997 and FY 2000. We expect to announce a similar level of studies over each of the next few years.
Depot maintenance or repair on weapons and major components involving workloads in excess of $3 million is statutorily exempt from the A-76 process. DoD and the Military Departments therefore have established specific procedures to structure fair competitions for these workloads. These procedures are being updated and improved in anticipation of future competitions.
Competition for Commercial Activities using OMB Circular A-76
Within the Department of Defense, experience demonstrates that competition has yielded both significant savings and increased readiness for each of the Military Departments. Between 1979 and 1994, DoD conducted over 2000 competitions using the A-76 process. Government organizations and private firms each won about half of these competitions. But regardless of who won, the results have been positive. As Figure 3a indicates, annual operating costs were reduced by 31 percent, resulting in cumulative savings of $1.5 billion a year.
The savings we have achieved highlight the potential benefits of opening up even more of our support activities to competition. The extent to which commercial activities are performed in-house varies by activity, as shown in Figure 3b.
Figure 3a.
Figure 3b.
Private and Public Sector Performance of Commercial Activities
This year, the Department of Defense is increasing significantly the number of functions that will be competed. Already, the Military Departments and Defense Agencies announced that they will conduct A-76 competitions involving more than 34,000 positions. Figure 3c illustrates that these competitions cut across a wide array of functions.
Figure 3c illustrates that these competitions cut across a wide array of functions.
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Figure 3c.
In addition, the Department's components will conduct A-76 competitions for functions involving 30,000 FTEs in each of the next five fiscal years for a total of approximately 150,000 FTEs. As shown in Figure 3d, this annual effort represents more than a threefold increase over any year in the previous two decades.
Figure 3d.
A Commitment to Competition
The above chart shows the number of full-time equivalents (FTEs) studied for A-76 competition each year.
Based on historical experience, we expect to save (and will include in our FY 1999 budget) approximately $6 billion over the next five years, with annual recurring savings thereafter of $2.5 billion as a result of these studies.
We believe that we can, and must, look beyond these numbers to other areas where competition can improve performance and lower cost. Currently, as shown in Figure 3e, only a small percentage of DoD's total personnel is in positions classified as commercial activities subject to A-76 competition.
Figure 3e.
Workplace and Commercial Activities Inventory
These classifications have been made over time, often on an ad hoc basis. To standardize our classification system, the Department will begin a review of all functions performed by its civilian and military personnel to identify which functions must be performed by government employees and which are commercial in nature and could be competed. This process is likely to increase candidates for A-76 competitions beyond the current levels.
Examples of A-76 Successes
In 1980 Fort Gordon, Georgia, used the A-76 process to compete installation logistics functions and its public works functions were competed in 1986. In 1990, the logistics and public works functions were combined into a Directorate of Installation Support whose work was competed and awarded to Johnson Controls. This resulted in annual contract savings of $916,000 and in-house savings, from elimination of duplicate logistics/public works staffs, of $225,000. Additional advantages of the combined contract include having a single contractor point of contact for installation customers and managers, and standardization of management, contract surveillance, and contractor-performance evaluation procedures.
Another important A-76 success has been the reengineering of the administrative and logistical support functions of the Defense Finance and Accounting Service (DFAS) facilities. In May 1997, DFAS completed the first ever multifunction, multi/location study in the government, involving all five of the major DFAS centers located around the country. The study involved such functions as mail, engineering, maintenance, and property management. In this competition, the in-house work force won by producing an annual savings of $4.1 million over the previous cost of completing the work. They accomplished the savings by streamlining operations, identifying opportunities for operational efficiencies, and reducing waste. This study was completed under schedule, in less than 26 months, instead of the allowed 48 months.
SECDEF Reform Decision:
By 1999, the Department will evaluate DoD's entire military and civilian workforce to identify which functions are commercial in nature and could be competed under the A-76 process.
- Additionally, we are already examining a range of other activities, many within Defense Agencies, to identify other potential candidates for competition including:
- Civilian Pay Including employee data, time and attendance data, leave accounting, pay computation, all reporting and disbursing (e.g., tax, savings bonds, allotments), and pay delivery for the approximately 800,000 DoD civilians; development, maintenance and operation of the data processing system and all feeder systems, such as personnel, accounting, and management information systems.
- Military Retiree and Annuitant Pay Including data maintenance, pay computation, entitlement determination, reporting and disbursing (e.g., taxes, allotments) and pay delivery for the approximately 2.2 million military retirees and annuitants; development, maintenance and operation of the data processing systems, and feeder systems, such as military pay, personnel, accounting, and management information systems.
- Personnel Services Including operation of automated personnel processing services, personnel data maintenance, injury compensation claims processing and data maintenance, selected education and training for military and civilian personnel, recruiting and support functions, and information management for personnel benefits and services.
- Disposal of Surplus Property Currently, the Defense Reutilization and Marketing Service (DRMS) disposes of the vast majority of DoD surplus property, with projected sales for FY 1997 of approximately $167 million. DRMS has 164 offices worldwide. DRMS is currently conducting limited A-76 studies. The Department will now expand the A-76 process across the DRMS operation.
- National Stockpile Sales - The value of our inventory of stockpiled metals is now worth about $5.4 billion, but only $44 million of this is needed to meet projected security emergencies. DoD officials currently perform sales, market research, quality assurance, stockpile maintenance, and security functions. Congress has now given us disposal authority for over $3 billion of the $5.4 billion in inventory. We will pursue opportunities for appropriate stockpile reductions.
- Management of Leased Property - DoD currently leases approximately 64 million square feet at a cost of about $938 million. Most of these leases are managed at the local level. We will examine competing leasing functions such as requirements definition, space acquisition, and lease administration.
- Drug Testing - DoD conducts an extensive military drug-testing program. Over three million samples from active duty personnel are tested each year, at a cost of $35 million. Currently, active duty and Air National Guard testing is conducted at government laboratories. Testing of recruits is already conducted through a commercial contract, at an annual cost of $3.3 million for 300,000 test samples. Drug tests for the Army National Guard are also done through a commercial contract.
National Defense Stockpile
Congress created the National Defense Stockpile of Strategic and Critical Materials (Stockpile) after World War II because the United States' heavy dependence on imports of raw materials had made the nation vulnerable to enemy attacks on cargo ships. During the Cold War, the Federal Government acquired large stocks of basic structural materials such as lead, nickel, zinc, tin, bauxite, fluorspar, and rubber, as well as the high technology materials titanium, beryllium, and cobalt used in aerospace applications. These stockpiles were designed to meet military, industrial and essential civilian needs in case of a three-year global war involving the total mobilization of the US economy. At the height of the Cold War, Stockpile requirements as determined by the Federal Emergency Management Agency were valued at over $15 billion and inventories acquired toward those requirements were valued at over $12 billion.
DoD was given responsibility for the Stockpile program in 1988. While initially planned around a yearlong global war, requiring total mobilization of the US economy, today we estimate the strategic materials needed for two simultaneous Major Theater Wars in Korea and the Persian Gulf with very short warning. In this situation, war damage to our overseas suppliers and shipping losses during import to the United States are greatly reduced. Today, DoD estimates that we only need Stockpile inventories valued at $44 million out of a total inventory still worth $5.4 billion.
DoD began a large disposal program for Stockpile inventories in 1993. The Congress has built many safeguards into the disposal process to avoid undue disruption of domestic and world materials markets and to ensure that we are constantly monitoring national security requirements for possible changes in needed Stockpile inventories. For each commodity, we must get special disposal authority legislation from Congress. Then we must consult an interagency Market Impact Committee composed of experts in domestic and world materials markets from the Departments of Interior, Energy, Agriculture, State, and Treasury. Once this committee has given us advice on appropriate sales levels to avoid undue market disruptions, we submit an Annual Materials Plan to the Congress which must be approved before sales can occur. As a result, sales in the early 1990s averaged only $200 to $300 million annually. However, Congress has now given us disposal authority for over half the $5 billion inventory and annual sales have reached $400 to $500 million per year.
DLA manages the Stockpile sales program and uses a variety of sales methods that are appropriate to the world market for each material. For example, tin is sold on a daily spot-market basis with the price set to the daily world price. Other materials such as cobalt are sold on a competitive bid basis with DLA having the flexibility to reject bids that are so low that they would cause undue market disruptions. Some of the materials such as asbestos and thorium nitrate have environmental hazards associated with them and will not be sold into commercial markets.
Competition for Depot Maintenance
DoD depots are currently performing maintenance on planes, vehicles, and other weapons systems much of which our military leadership believes could also be reliably performed in the private sector. For this work, as for the commercial activities described above, competition between public teams and private firms will sharpen the performance and lead to better value for the Department.
As mentioned above, depot maintenance work is largely excluded by statute from the A-76 process. To ensure fair competition, DoD has established a set of rules and procedures to compare public and private sector bids. Currently, the amount of workload performed in-house by the Services ranges from 63 percent to 72 percent. The Department will continue to pursue public-private competitions to the extent allowed by law.
The amount of work the Military Departments are able to subject to competition depends both upon DoD's own risk analysis and statutory limits on outsourcing.
It is important to note that the Defense Department will continue to need organic depot maintenance activity to meet core warfighting requirements. No automatic nor arbitrary goal should constrain what must be a careful case-by-case evaluation for work undertaken in depots or in the private sector. The recently conducted C-5 maintenance competition between public depots and the private sector demonstrated, however, that competition is a powerful incentive to both sides to lower costs. The taxpayer saved $190 million and avoided millions more in facilities costs through that one competition. Competition brings out the best in everyone.
Figure 3f.
Depot Maintenance Workloads(FY 1999 in $ Millions)
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Competition between the public and private sectors offers us a way to infuse our defense support activities with the dynamism of the market. It will also make the Department more agile and efficient.
We know competition between the public and private sectors works. We see its fruits every day in the better service it gives our troops and the better balance it gives our ledgers. It empowers workers, both public and private, challenging them to provide higher quality and lower cost.
Our challenge today is to seize the opportunities in front of us and to think anew about what additional DoD functions stand to benefit from competition. We need to realize that the benefits of competition are not a luxury, but a necessity, as we seek to maintain the world's premier military force as we enter the 21st century.
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