Down to the Core

While such formal reviews-where government workers reengineer their operations to compete with contractors for specific workloads-have been periodically conducted at Defense since the 1950s, never before have they been conducted on such a large scale. In the 17-year period between 1979 and 1996, the Defense Department reviewed about 90,000 positions for transfer to the private sector; through 2005, the department says it will review 229,000 positions. In other words, it will compete more than twice as many positions in one-third the time.

Not surprisingly, this unprecedented level of competition is making civil servants anxious. After all, about 60 percent of those whose jobs are competed are likely to lose them, if the historical data is any guide. But the plan is also drawing criticism from the private sector, military officials, budget analysts and lawmakers.

The Defense Department's plan "gives a bad name to good words like 'privatization' and 'competition,' " says Bill Johnson, legislative director for Rep. James Hansen, R-Utah. "When you promise what you can't deliver, you create problems, and that's what we think is happening here."

The Pentagon says it will deliver $11 billion in savings by 2005, and achieve recurring annual savings of more than $3 billion thereafter. Pentagon officials are so confident the savings will be achieved, they've already programmed the reduced operating costs into their budget. If savings levels fall short, the military services and Defense agencies will have to cut spending further to meet their targets.

"The sheer magnitude of what [the Pentagon] is talking about is totally unrealistic in our opinion," Johnson says. "We think it's driven not by a desire to reform the Pentagon, but rather by a desire to do two things: One is to use those projected savings to shore up a grossly underfunded Defense budget, and the other is to allow the President and Al Gore to run around the country talking about the end of big government."

'Smoke and Mirrors'

The competitive sourcing program is part of Defense Secretary William Cohen's Defense Reform Initiative, a massive effort to reform military support operations by closing more bases, cutting headquarters staff, reengineering business practices and turning over commercial activities to the private sector.

To a large extent, the reform is driven by the department's fiscal problems. As a result, critics say, the savings targets for the competitive sourcing program were derived before the department conducted a thorough review to determine how many positions could realistically be competed. That concern, coupled with the fact that the so-far-unrealized savings were factored into the services' budgets, has made even the plan's supporters uneasy.

"We're big fans of competition," says Johnson. "We just think they've got it backward when the first thing they do is identify a number of positions and then take that savings and remove it from the budget, before it's ever saved."

Adding to skepticism about the savings estimates is the fact that Defense officials already revised the savings predictions upward once this year, from $6 billion through 2003, to the $11 billion they're now projecting through 2005.

"Based on no evidence-because they hadn't actually completed many [competitions] last year-they've now doubled that savings wedge. We just think it's a smoke and mirrors game to deal with the fact that [the administration] continues to refuse to fund the Defense Department at an appropriate level," Johnson says.

General Accounting Office auditors, who have issued dozens of reports in recent years on DoD's progress in conducting public-private competitions, believe the department's business reform efforts are laudable. But they say that savings estimates attributed to the latest competition goals are significantly overstated. In particular, DoD has not calculated the cost of conducting the competitions or the resulting personnel separation costs. While competitions ultimately result in savings no matter who wins, the up-front costs of conducting them can be significant.

"The [savings] projections did not adequately consider investment costs related to performing A-76 cost studies. In addition, the competitions will likely take longer to complete than estimated. Both of these factors will affect how quickly DoD components will begin to realize net savings from the competitions," GAO recently reported (NSIAD-99-46).

Among the problems GAO cited:

• Army installations and major commands estimate it will take 50 percent longer than Army headquarters officials planned to complete the competitions and achieve savings.
• Officials at the Naval Sea Systems Command don't believe they have enough positions suitable for competition to meet the goal set for the command.
• The Navy's acquisition chief believes the savings targets are considerably overstated and will result in further instability in the procurement account.
• One Air Force official reported that most major commands are worried about the effects of funding competitions and personnel separation costs at their installations.

Johnson sees two potential scenarios resulting from what he calls the Pentagon's overreach for savings: Either the savings won't be achieved, even though the money already has been budgeted for other programs, or the political pressure on the department becomes so great that it contracts out core functions in order to meet the savings targets.

"Then you have a serious risk to the department's mission, which in this case is national security-probably not the place we should be taking significant risks," Johnson says.

Not all the pressure on Defense to achieve significant savings is coming from the Clinton administration. Lawmakers have stepped up pressure on all federal agencies to stop using government employees to perform services that can be purchased in the private sector. The idea is that a competitive marketplace will ensure services are performed more efficiently and at lower cost. Last year Congress passed the Federal Activities Inventory Reform Act, known as the FAIR Act, which requires Defense and other executive agencies to annually publish a list of activities that are not inherently governmental but that are performed by a government source.

The FAIR Act paves the way for agencies to contract out more work, says Robert Raasch, general manager of the public enterprise division at Keane Federal Systems. Agencies won't publish their commercial activities lists until June 30, but word on the street is that DoD's inventory will be the most aggressive by far, Raasch says.

One reason is that DoD has much more experience conducting public-private competitions than other federal agencies. "The Department of Defense in general, while not perfect, is much more attentive to business management and business process efficiency than most civilian agencies," says Bert Concklin, president of the Professional Services Council, a trade association for the professional and technical services industry.

Jump Start

The bulk of Defense competitions have been conducted by the Air Force. In a GAO review of 53 DoD competitions completed between 1995 and March 1998, 41 were done by the Air Force (NSIAD-99-44). Eighty-five percent of the 5,757 positions competed during that time were in the Air Force.

The Air Force has aggressively pursued competitions because service leaders saw an opportunity to achieve much-needed savings before the Defense Reform Initiative was even begun, says Brig. Gen. Richard Bundy, the Air Force's director of manpower, organization and quality. Seeking ways to move more funds into its flagging modernization programs, the Air Force conducted a service-wide inventory of commercial activities in 1996 under a program called Jump Start.

"We got an initial feel for what we thought were commercial activities that we could legitimately compete with the private sector to reduce our operating costs and preserve the capabilities,"
Bundy says. That doesn't mean the process has been easy. Under DoD's goal of competing 229,000 positions by 2005, the
Air Force is to identify and compete 54,000 positions. And while the service has been out in front of the other services in competing positions, it has no experience conducting the reviews on such a large scale.

"Right now, we're about 15,000 positions short," says Bundy. He says he is confident the Air Force will meet both its competition and savings targets, but it will be a stretch.

"So far, we have been exceeding our expected savings. I won't tell you by how much because then somebody will hold us accountable for this dynamic." Initial success has not eased the pressure to save more, Bundy says. Although the Air Force has exceeded its original fiscal targets for manpower management, the pressure to find additional savings through competitive sourcing has only increased, he says.

"The Air Force is still short of having enough money to pay for itself. So we go into 2000 short about $2.5 billion to $3 billion to pay for the things we need. The competitive sourcing program is seen as a way to reduce that. There's pressure to do as much as possible by all means."

In addition, the cost of conducting competitions is not trivial--nor is it budgeted. The Air Force estimates it will move about $250 million from other Air Force programs to pay for the competitions and the resulting personnel transition costs. "It's been an expensive realignment and it's been painful for the Air Force," he says.

Flawed Process

The vast majority of public-private competitions at the Defense Department are conducted according to the Office of Management and Budget's Circular A-76 guidance.(Depot maintenance workloads are governed by different regulations.) The A-76 review process is viewed by federal officials as unwieldy, and by potential bidders in industry as inherently unfair. One of private companies' chief complaints is that the Defense Department cannot accurately measure such things as overhead costs.

"The most difficult part is how you compare contractor costs to government costs, where the government doesn't have good bookkeeping systems, it doesn't deal with depreciation, it doesn't deal with the cost of capital," says John Douglass, a former Navy acquisition chief and now the president of the Aerospace Industries Association.

While Douglass understands the shortcomings of the A-76 process from both the government and industry perspectives, he also is familiar with the Pentagon's habit of counting savings before they are achieved. When he arrived at the Pentagon in the mid-1990s, he inherited a Navy acquisition budget with estimated savings for various privatization and outsourcing initiatives built in.

"What the Navy was not able to do was actually save the money. So every year we had this huge bill to pay that was approaching a billion a year. We hadn't made enough changes to save the money, so instead of having that money to go into ships, or airplanes or whatever, it went to pay back what we had taken out. That was a serious mistake, in my opinion," Douglass says. "It's very dangerous to take the money out [of the budget] before you can actually, concretely, see the savings. The Navy's a perfect example of that."

Douglass has high praise for Deputy Defense Secretary John Hamre, who has for years worked to improve the Defense Department's finance and accounting systems. "As the department gains better visibility into what their costs really are, the A-76 process will get better for everyone, Douglass says.

"Hamre deserves an enormous amount of credit for improving that system. He's had to do that almost single-handedly. The military, bless their hearts, they want bombs, bullets and airplanes. When you say, 'Hey, let's spend millions of dollars to improve your accounting practices,' they aren't too thrilled about that."

While Defense accounting practices have improved in recent years, they remain problematic, both in terms of estimating indirect costs for conducting A-76 reviews, and in terms of estimating savings from competitions.

High Up-Front Costs

While DoD has not specifically budgeted funds for conducting this unprecedented level of A-76 reviews, Defense officials estimate they will cost about $2,000 per position competed.

GAO is skeptical. The Air Force analysis, upon which Defense estimates are based, did not include an estimate of costs associated with developing the most efficient in-house organizations, which then compete with the private sector. Such administrative costs can be considerable, and are likely to vary from service to service.

For instance, the Marine Corps estimated competitions would cost $6,700 per position, 80 percent of which would fund contractor support. The Air Force, which has the most robust in-house staff organization to oversee A-76 competitions, is sticking with its $2,000 per position estimate, although it expects to spend more than $7 million this fiscal year to augment understaffed manpower management offices with contractor support. Competitions typically require support from the function being studied, as well as personnel, legal, contracting and audit staffs.

"Various officials told us that the resource requirements for the studies are much greater than both DoD's $2,000 benchmark and their service's own initial estimates," GAO reported. "For example, officials at one Army major command
estimated they would employ about $28 million in resources for their competitions-$4 million for centrally funded
contractor support costs and $24 million for existing in-house staff-to compete 4,000 positions in a multi-function, multi-location study, at least $7,000 per position." Some Navy estimates have ranged from $7,000 to $9,000 per position to compete, GAO reported.

"Without allocating sufficient resources to complete the competitions, DoD components may be unable to initiate or complete previously announced competitions within reasonable time frames. The pressure to complete such a large volume of competitions at one time increases the risk of poorly developed work statements, which have historically been cited as a problem area in the competitions. Poor performance work statements require subsequent revisions, reducing the level of savings from that initially expected," GAO reported.

Transition costs for Defense employees who lose their jobs will be significant as well. GAO found that none of the services adequately estimated such transition costs as early-retirement incentives or separation benefits, which could range from $20,000 to $33,000 per employee. In addition, as the Pentagon begins competing more complex positions and workloads, the costs will also rise. "The reality is this is going to be very, very hard to do," says Concklin. Until now, most A-76 reviews have been for blue-collar jobs in such areas as base support and maintenance. In the future, more complex, high-tech jobs, such as in laboratory and engineering operations, will be reviewed for outsourcing.

"When you do that, the simple rules of A-76 become even more inappropriate and inadequate to the task of truly making a best-value decision between whether to keep the work in-house in the government or to outsource it," Concklin says. Because costs savings are predicated on conducting a robust competition, and because industry in general does not believe the A-76 process presents a level playing field, there is the real possibility the Defense Department won't be able to attract enough qualified bidders for some positions, he says.

Shadow Workforce

The Defense Department's competitive sourcing plans raise another potentially troubling issue: The department has no handle on the size and scope of its contractor workforce. While Pentagon officials at any given time can tell you how many employees the department has, where they are and what they're doing, that's not the case with its vast contractor workforce.

And while the ever-shrinking civilian and military workforces are continually subject to scrutiny, the contractor force goes virtually unnoticed.

Patricia Armstrong, a management analyst at the Naval Aviation Depot in Cherry Point, N.C., and a Federal Managers Association chapter president, says 84 cents of every dollar the Naval Air Systems Command spends goes to the private sector. "If we're going to reach that kind of savings [sought by DoD], we can't reach it just with dollars we spend internally on our own overhead and our own people. We've got to look at what we spend externally."

An Army study completed last spring, "Identifying and Estimating the Contractor Shadow Force," concluded that the Defense Department spends $71 billion on contract manpower. That's 28 percent of the department's direct, obligational budget authority and more than the 26 percent it spends on military manpower.

"Ironically, the non-core services provided by contractors continue to escape DoD downsizing and overall infrastructure initiatives while continued reductions are driven in DoD core operations," John Anderson, director of the Army study, wrote in a white paper.

Inadequate tracking measures have rendered this large contractor force virtually invisible to Defense manpower managers, Anderson says. For instance, the Army reported 44,000 contract manpower equivalent positions in its 1996 inventory, but a more thorough analysis of cost data revealed there were actually 228,000 positions.

Collecting and maintaining more reliable contract manpower data will be essential to reforming military operations, downsizing and outsourcing, Anderson says.

With or without such scrutiny, however, pressure on the military services to conduct competitions is not likely to let up. Says Bundy: "If we continue to stay as engaged in the world as we are, with ongoing deployments to Southwest Asia, Bosnia and Kosovo, and continue this operating tempo with a frozen top line to the budget, the pressures are going to go on to find alternative ways of doing things."