Defense Outsourcing: The OMB Circular A-76 Policy

Publication Date: April 2005

Publisher: Library of Congress. Congressional Research Service

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Research Area: Military and defense

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Abstract:

This report provides information on the Office of Management and Budget's (OMB) Circular A-76, "Performance of Commercial Activities," and the impact of a related reform initiative, the Federal Activities Inventory Reform Act (FAIR) of 1998, within the Department of Defense (DOD). The Circular defines federal policy for determining whether recurring commercial activities should be transferred to performance by the private sector, or performed by federal government employees. The FAIR Act creates statutory reporting requirements for federal executive agencies, by requiring federal executive agencies to identify activities both "inherently governmental" and those not inherently governmental, and to conduct managed competitions to determine who is best to perform the service. Competitive sourcing, through managed competitions, was a major initiative identified by the first Bush Administration's Presidential Management Agenda, and one of five governmentwide initiatives to improve the management and performance of the federal government. It is likely that competitive sourcing will continue to serve as a major initiative in the second Bush Administration.

Despite the fact that DOD has substantially downsized its force structure after the end of the Cold War, operations and support cost have not been proportionately reduced. In order to achieve greater reductions, and as part of its Defense Reform Initiative, DOD announced that 229,000 positions would be opened to managed competition; by FY2005, some 237,000 jobs. Historically, DOD has set the pace as the lead federal agency in using OMB Circular A-76 cost comparison studies as a tool for managing competition for federal contracts.

The effectiveness of the OMB Circular A-76 policy has been the subject of rising debate. Some proponents view the policy as a catalyst for competition in the marketplace, and as the vehicle to increase efficiencies, lower costs and encourage technological advances. They argue that the government should stop providing some services, and not compete against its private citizens. Other proponents view the policy as an instrument for driving efficiencies. Some opponents view OMB Circular A-76 and the passage of FAIR as efforts to dismantle what has been traditionally viewed as the "proper role of government." They challenge the notion that the process will ultimately save money, by arguing that projections of costs savings have been overly optimistic. Others assert that besides resulting in the loss of thousands of federal jobs, FAIR may create new constituencies that could generate new pressures for the transfer of jobs from federal employees to the private sector.

The degree to which managed competitions, throughout the federal government, increase efficiency and save money will likely depend on the extent to which federal agencies employ OMB Circular A-76 and the FAIR Act. Congress can exercise its oversight authority by (1) monitoring federal agency progress in the implementation of OMB Circular A-76 policy and FAIR (2) determining whether cost savings are real; and (3) granting federal agencies the authority to explore alternatives to achieve costs savings besides OMB Circular A-76.