Chapter 3: Streamlining Through Competition

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.

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.

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.

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.

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.

Table of Contents || Message from the Secretary

Chapter 1 || Chapter 2 || Chapter 3 || Chapter 4

Appendices A & B || Appendix C