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REFORM INITIATIVES
House of Representatives,
Committee on National Security,
Military Readiness Subcommittee,
Washington, DC, Wednesday, March 12, 1997.
The subcommittee met, pursuant to notice, at 2:03 p.m., in room 2212, Rayburn House Office Building, Hon. Herbert H. Bateman (chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. HERBERT H. BATEMAN, A REPRESENTATIVE FROM VIRGINIA, CHAIRMAN, MILITARY READINESS SUBCOMMITTEE
Mr. BATEMAN. Today the Subcommittee on Military Readiness is meeting to obtain a better understanding of the Department of Defense efforts to manage and reduce its infrastructure. The subcommittee is particularly interested in how the Department of Defense is integrating privatization and outsourcing into these efforts. The leadership of the House of Representatives have charged all committees to actively review and pursue opportunities to improve agency efficiency and increase the use of private sector services. Although the Department of Defense has successfully downsized 8 Army divisions, 14 Air Force and Navy wings, 216 battleforce ships, and over 600,000 military personnel, its efforts to reduce the infrastructure supporting these forces paled in comparison.
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We recognize that DOD's excess infrastructure and related management problems did not happen overnight and they cannot be solved overnight. As a result, the Readiness Subcommittee has taken the lead in attempting to find solutions to these problems. Over the last couple of years, Congress and this subcommittee have recommended several changes to help DOD adjust to the downsizing and budget constricted environment. These efforts include contracting out overseas transportation of exchange and commissary goods, printing and duplication services, and direct vendor delivery for several consumable inventory items.
In addition, we have limited DOD's efforts to simply automate outmoded business practices which lead to perpetuating inefficiencies and mistakes. Many of us here today remember prior programs that DOD had used in an attempt to create savings in the defense budget. Most notable was the Defense Management Review Directives. The DMRD's provided for sizable savings in the outyears, and DOD took those savings out of their future defense budget. At the time, we consistently asked the question what will happen if we do not achieve your projected savings? We were continually reassured that the savings would happen. It should not come as a surprise to anyone that many of these savings did not materialize.
The Department of Defense is now once again telling us that the savings they have taken out of future budgets will materialize through the use of outsourcing and privatization. I would really like to believe them this time, but it will take some convincing. Given that nearly everything that will be considered in this area could be crucial to and directly impact force readiness, I am concerned with the lack of consistent methods for developing savings. We can no longer afford to bank troop readiness on guesstimates.
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Privatization and outsourcing are not bad as long as there is a detailed review of the benefits to such actions in terms of real cost savings and assurances that we do no harm to the services' readiness capabilities. It is time to embrace new initiatives that increase program efficiencies, support increased agency competition with the private sector, and explore methods of integrating the best practices of the corporate world into DOD programs. It cannot be expressed enough that in this austere budget environment, we need to make each defense dollar count. We owe it to the American taxpayer and our soldiers, sailors, airmen, and marines to ensure that there is sound stewardship over the resources that are entrusted to the Department of Defense.
In doing so, we are committed to redirecting funding from outmoded practices and unnecessary programs to support our troop and overall readiness. Today for our first panel we have Mr. David Warren, Director of Defense Management Issues, who will represent the General Accounting Office. For the second panel, we have Mr. John Goodman, the Deputy Under Secretary of Defense for Industrial Affairs and Installations; Rear Adm. John Scudi, Director of Shore Installation Management, Department of the Navy; Maj. Gen. Joseph Steward, Deputy Chief of Staff for Installations Management, U.S. Marine Corps; Maj. Gen. Randolph House, Assistant Chief of Staff for Installations Management, Department of the Army; and Brig. Gen. Hugh Cameron, Commander of the Air Force Center for Quality and Management Innovations. These witnesses will be representing the Department of Defense and military services.
Our final panel will consist of Mr. Bobby Harnage, Sr., National secretary-treasurer, American Federation of Government Employees, AFL–CIO; Mr. Gary Engebretson, president, Contract Services Association of America; Mr. Stanley Kawaguchi, president, American Consulting Engineers Council; Mr. Thomas Hewitt, president and CEO of Federal Sources, Incorporated; and Mr. Roy Cloudsdale, vice president, Global Business Delivery Systems, Integrated Facility Management, Johnson Controls, Inc. These will give us the private sector's perspective on privatization and outsourcing and the opportunities or impediments to such activities in the public sector.
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Before we go into hearing from our panels, I would like to yield to Hon. Norman Sisisky, the ranking Democratic member on the Readiness Subcommittee, for any statement he would like to make. I would also note that the subcommittee has received a statement from Congressman Duncan on these issues, and without objection, his statement will be entered in the record.
[The prepared statement of Mr. Duncan can be found in the appendix on page 641.]
STATEMENT OF HON. NORMAN SISISKY, A REPRESENTATIVE FROM VIRGINIA, RANKING MEMBER, MILITARY READINESS SUBCOMMITTEE
Mr. SISISKY. Thank you, Mr. Chairman. I join with Chairman Bateman in welcoming you to this Readiness Subcommittee hearing today. I look forward to hearing your views on the status of the implementation of DOD's infrastructure reduction plans and the results of reform initiatives you have started. Your views, along with information we have been receiving in earlier hearings, are very important as the subcommittee seeks to provide the best national security that we can for the dollars available. Mr. Chairman, I think we all readily agree that the supporting infrastructure is a significant contributor to force readiness, and most of us recognize that the DOD infrastructure requires updating, and what we have today evolved out of the cold war era and might not be relevant as it exists today.
While change is essential, I am concerned about the process that has been established where those changes are occurring. The process must allow the changes to take place in a disciplined, orderly, and efficient manner, where the rules of the game are clearly understood and followed, and where we understand to the best of our ability the cost and the benefits, or the forces will suffer from the effects of another experiment with good intentions but not well thought out.
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As one who has spent a lot of time in the business world, I understand the Department's desire to improve performance while reducing overall costs. I hope that the infrastructure changes that will be addressed here today are not just budget driven, but rather that are the result from someone seriously addressing the implications of the proposed changes in our ability to execute national strategy, and with all of the personnel changes that have occurred in the Congress, I am concerned that we here in the Congress might not fully understand the impact of some of these infrastructure changes on combat readiness. In that light, I look forward to hearing our witnesses today provide us with their assessment of the process as well as the privatization initiatives.
Specifically, I look forward to them addressing the following concerns: How confident are you that the promised savings will be realized; what are the risks and implications if the anticipated savings are not realized, and what are the overall investment costs; what is the anticipated pay back period; what is the evidence that savings at the planned level have been realized at any of the installations where privatization has taken place; what has been the impact of the privatization initiatives on the morale of the civilian work force; what has been the impact on the retention and performance of the affected civilian personnel; what assurances can you provide to this subcommittee of the Congress that privatization activities will be implemented in accordance to the letter of the law; how does the department plan to assess and monitor the changes to the infrastructure to ensure that the changes do have the desired effect; and what can we do to assist the department in achieving its readiness goals? I thank you for coming today. Your testimony will help us understand more about these pressing issues, and thereby help ensure that we preserve our nation's security, and I look forward to hearing your testimony.
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Mr. BATEMAN. Thank you, Mr. Sisisky, and at this point we turn to Mr. David Warren and welcome his presence and his testimony.
STATEMENT OF DAVID R. WARREN, DIRECTOR, DEFENSE MANAGEMENT ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION, GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY: JULIA C. DENMAN, ASSISTANT DIRECTOR FOR DEFENSE MANAGEMENT ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION; AND BARRY W. HOLMAN, ASSISTANT DIRECTOR FOR MILITARY OPERATIONS AND CAPABILITY ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION
Mr. WARREN. Thank you. I would like to just summarize my remarks. I have Ms. Denman and Mr. Holman with me who have worked extensively in these areas. Mr. Chairman and members of the subcommittee, I am pleased to be here today to present our observations on DOD's goals to save some $20 billion by outsourcing work to the private sector and through other initiatives. For fiscal year 1997, DOD estimates that about $146 billion, almost two-thirds of the defense budget, will be for operations and support activities.
First, it is important to say that we agree with DOD and others such as the Commission on Roles and Missions and the Defense Science Board that there is significant opportunity to reduce DOD's infrastructure and support costs. We also agree that many of the initiatives that have been proposed relating to outsourcing and privatization represent real opportunities for helping to achieve those savings. However, to the extent that those savings are not achieved, DOD and the Congress will be left with difficult decisions about how to fund Defense priorities such as weapons systems, modernization, and readiness initiatives.
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Specifically, our work shows that past savings initiatives, while yielding significant savings, have often fallen short of DOD's initial goal or they have not been fully implemented. For example, the Defense Management Review Initiative did not achieve a significant portion of the $71 billion savings that were originally estimated and many of the initiatives proposed were not accomplished.
The proposal to save $5.6 billion by consolidating inventory control points, depots, and other support activities is an illustration. The base closure and realignment process did make substantial progress in reducing DOD's infrastructure. However, our work also shows that billions of dollars in savings will ultimately be achieved; they will not be as great as initially estimated nor will they be achieved as quickly as hoped. So there is a timing problem with those.
Also A–76 efforts to outsource various commercial activities yielded some savings, but again the amount was much less than anticipated. In the final analysis, today's Future Years' Defense plan shows that infrastructure costs will only slightly decrease as a relative percentage of DOD's budget into the future.
Because of the concern about waste and inefficiencies in DOD support structure, we have designated it as one of our 24 high-risk areas within the Federal Government. Let me give you a few examples of why we did that. There is a need to continue reducing the 35-percent excess capacity in laboratories and centers. There is a need to reduce the remaining 24-percent excess capacity within DOD's $15 billion depot maintenance activity program. There is a need to reduce inventory costs by more aggressively using best practices in DOD's management of its $67 billion inventory of spare parts, spare and repair parts. Also, reducing the $30 billion installation support costs by greater reliance on interservice arrangements and outsourcing opportunities represents another example.
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Today, as you are aware, new ideas for reducing infrastructure costs have recently been proposed to DOD, and they focus largely on outsourcing and privatization. Our analysis of the Commission on Roles and Missions, Defense Science Board, and A–76 proposals shows just as with past initiatives, there is reason for caution about whether the hoped level of savings can be achieved. Additionally, it is important to note that there are various legislative requirements that will restrict and otherwise affect DOD's ability to implement the DSB and CORM proposals as now presented.
Let me give some examples. For example, the CORM estimate of $3 billion in annual savings are primarily based on reported savings from A–76 public competitions. However, our work shows that the projected savings from those studies is often not as high as expected. Similarly, the DSB's $30 billion savings projections look to be overly optimistic. For example, they indicate that privatization will reduce costs from increased competition. However, in several of the areas that are suggested, we do not see a competitive market that would create the level of savings anticipated.
As an example of the legislative situation, there is a legislative restriction or prohibition on outsourcing civilian firefighters and security guards at military installations which involve some 25,000 personnel. In other words, those folks are off the table already before you start going in and applying the initiatives and proposals that the department is thinking about as well as items that are being suggested to them.
In conclusion, the opportunities for savings, in fact, are great. However, as I said, it is questionable whether the magnitude can be changed. Notwithstanding this, we think the effort on the part of DOD in this area is extremely important and one that has to be dealt with. As we stated in our high risk infrastructure report, we believe breaking down cultural resistance to change, overcoming service parochialism, setting forth a clear framework for reducing defense infrastructures are keys to effectively implementing savings and initiatives. To do this, we believe the Secretary needs to develop a strategic plan that establishes time frames, individuals responsible for accomplishing fiscal and operational savings initiatives. This plan needs to be presented to the Congress to provide you with an opportunity for reviewing it and also overseeing the plan's implementation. An added advantage would be that the plan would also allow the affected parties to see how and when reductions are going to be made. And that is critical. That is the process, in essence, that was used when we made our force structure reductions that came up with the base plan. Everybody understood how the forces were going to be reduced, there was general agreement on that, there were time frames that were established, and we moved forward and did that.
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We think something in the infrastructure area along this line would be extremely useful because I think there is a lot of confusion about how all these initiatives will come together in a coordinated plan and what they will mean for each of your base support activities, what they will mean for your finance support activities, what will they mean for your labs, and what they will mean for your depots, and all that other host of activities that go to make up this $145 billion expenditure on an annual basis.
Mr. Chairman, that completes a summary of my remarks, and I would be happy to respond to any questions you or the members have.
Mr. BATEMAN. Thank you very much, Mr. Warren, and your written statement will be made part of the record without objection.
[The prepared statement of Mr. Warren can be found in the appendix on page 645.]
Mr. BATEMAN. Your investigation and our experience have generally indicated that projected estimated savings are generally not realized. Is that a fair statement?
Mr. WARREN. I am sorry. I did not hear, sir.
Mr. BATEMAN. Your experience and investigation indicate that projected estimated savings are seldom realized in the full amounts projected?
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Mr. WARREN. That has typically been the case. For example, the DMRD was a good example. Ultimately, they recommended or projected that $71 billion in savings could be achieved over the 6-year period. We went in and took a look at that and in terms of the basis for those savings, we found that 82 percent of the support, in essence, behind those projected savings were based on management judgment. Now management judgment is not bad, but in terms of providing the level of specificity that is needed to give assurance that you are going to get there is a problem. That number then was further scrubbed by the Defense Science Board and Mr. Odeen led that panel. At that point in time, the department had revised its estimate down to about $61 billion, and the Odeen panel concluded that you could probably knock another $10 to $11 billion off of that and ultimately said, given what we have seen and what we have been briefed, we do not think there is any value in the Department continuing to track those savings.
So today I think it is a fair statement to say that we cannot tell you what the final number in savings was, nor can the Department.
Mr. BATEMAN. That being the case, if you are concerned about maintaining an adequate state of readiness and military capability, can we take these projections and treat it as if it is money in the bank and make all of our budget conclusions on that basis?
Mr. WARREN. At this point in time I would not say that is a safe approach, but I think also in terms of balance and savings, let us take the various. The first initiative through A–76, we understand that the Department expects to achieve about $2.5 billion in savings, and I think given the magnitude of dollars we are talking about, that is a modest savings proposal to put out. Do I think we will get all of that $2.5 billion? No, I do not think we will get all of that, but we will get some portion of that.
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Then you move to the next estimate, and again this is a proposal the Department has not accepted from the CORM, that perhaps you can get $3 billion in savings through doing some of the things that the CORM suggests. That one becomes a little more complicated because then they are asking to outsource a greater set of activities that previously have not been subject to that. There are some congressional restrictions about doing that, and it is also based on A–76 data where there is not a great deal of confidence.
Then you move to the $30 billion in the Defense Science Board report, and that is based on, in essence, a fundamental assumption that there is going to be what I would call a paradigm shift, a change in vision the DSB refers to, that will require a whole new way of doing support business within the Department of Defense. They also use A–76, same type of A–76 data, to start to project some of their savings, but there are many assumptions in the Defense Science Board that say many of the frameworks, legislative and policies that we have in effect today, will, in essence, need to go away in order to get that $30 billion.
So as I walk up the stair step, I become more and more skeptical about the ability to, in essence, your question, put those in the bank. And to the extent that those initiatives start to get implemented, I think, as was referred to in the opening statements, there has got to be a process for closely monitoring, seeing how we are doing.
Mr. BATEMAN. Thank you, Mr. Warren. Mr. Sisisky.
Mr. SISISKY. Thank you, Mr. Chairman. Mr. Warren, I thank you for being here and your excellent staff. We have done business since about 1983 on privatization issues and have uncovered some very interesting things. I have gotten a reputation, to some degree, of not in favor of privatization. I want you to know that I am in favor of privatization when it makes sense and when we follow the rules of the game, and you know exactly what I am talking about. We are not supposed to bring up depots or anything in here today, but—[Laughter.]
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But some, oddly enough, and you know some companies have gotten things without any numbers. I mean it has been unbelievable, you know, and we sit here and say we are against privatization. We are really not. We are for privatization that makes sense. And some members of the committee—am I correct—GAO is under some constraints? I do not think you have been able to disagree with anything in the BRAC Commission. I think we ran into that a time or two. Determination with respect to the desirability of contracting out as a matter of overall policy. You can look at a contract and see if everything went by the book, but you cannot say the policy is wrong. Now, if I heard you correctly, you have not been able to track the savings; is that a fair thing?
Mr. WARREN. As a general statement, that has been one of the difficulties, and the DMRD's are a classic example of that in terms of just inability to follow and track those savings.
Now, it is quite correct—I think the chairman mentioned that the savings were taken out of the budget so the cuts were made through the Future Years' Defense Plans. However, when you tried to go back and say, OK, show me now where those savings and efficiencies were achieved, that is where it starts to break down.
Also, I would mention that with the BRAC process, the initial estimates are made with regard to the savings and costs. After that, what the Department has informed us is that they do not update those figures, and we recently attempted to go back in and take a look because that question was out there; and the best that we could do was to go in and take specific case studies. In other words, we had to follow down for our own purposes to find out what it looked like, and I may have to change these numbers for the records, but the order of magnitude is correct. For the 10 bases that we looked at, the initial savings projected by the BRAC were around $800 million through the first 6-year period, which is the implementation period.
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As we looked at savings through the implementation period, we found that, in essence, there was going to be a net cost. In other words, savings were not going to accrue during that initial 6-year period for that sample of bases.
However, when we moved out into the future years, and I think 10 years was the outside mark, we did, in fact, find annual savings of $222 billion being generated back to the Department. So that was the basis for my opening statement to say savings are substantial; they are a little less than estimated originally, and they are going to come a little bit later, and I think that is part of the problem the Department has been facing. They are eagerly waiting for those savings to come along to be of help to them.
Mr. SISISKY. If I remember correctly, and as I get older I do not remember as well as I used to, that how you can do accounting—was it not true that the services do not always open their books to you? Do they not tell you they are not up to date and they are behind? Is that fair? If my memory serves me right.
Mr. WARREN. I would say in some cases we have had difficulty getting data, but in general I think the Department has been cooperative with us in terms of providing the information that we need to make the analyses. What we have found sometimes it is not as complete or as detailed. As I said, for example, in the DMRD's, when you went back for the cost support, it was management judgment. That becomes—in the BRAC process, in general, we do find numbers there. Sometimes it gets harder to get them, but in the final analysis, I think we have been able to get the data that we need to do the work. The bigger point to me is at the departmental level there is not an overall tracking. In other words, the Department is saying now they are going to have a $6-billion turnaround. In other words, they are going to start to be accruing $6 billion. We were not able to verify that number, and I think it is probably largely based on taking the gross estimates that were made in the very early rounds and everybody understanding that BRAC started back in 1988. We are almost 10 years into this process. So that has been the bigger problem for us.
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On more recent work, we are trying to take some look at AGMC, the facility that was privatized out in Newark, and we are experiencing some delays in getting some data from the standpoint we would like to have that for the hearing next week. I guess next Tuesday. And that is not coming as quickly as we would hope.
Mr. SISISKY. I will give you a couple more next week.
Mr. BATEMAN. All right. Next, Mr. Chambliss, and we will be proceeding under the 5-minute rule.
Mr. CHAMBLISS. Since we are not talking about depots, maybe I can get it all in in 5-minutes. I am curious about your comments on BRAC because from what I have read, I think you are absolutely right—the savings are not there, the projected savings, but is it for the reason that we just did not make the right projections initially or is it because we are just not following the BRAC process?
Mr. WARREN. My general assessment would be that the initial projections are the problem. In other words, my experience has been, and we have probably done 10 to 12 of these types of reviews where we have gone in and looked at individual closure decisions to determine cost effectiveness, and typically what we find is this pattern of overall the closure still makes sense from a cost and savings standpoint; however, the initial savings tend to move down and are not as great as initially estimated and also take a little bit longer.
I think, again, to the Department and probably everybody involved in this process, we really had not closed any bases within the Department of Defense since about 1972. We restarted in 1988, and people did, in fact, have to make a lot of judgments about what this was going to cost, and one of the key things that became involved is environmental costs. There have been a lot of changes in environmental regulations over that period of time, and as a result I think environmental costs were one of the factors that caused the cost to be a little bit higher than anticipated. I think we have budgeted through this point, through the 1995 round, about $8 billion to fund base closure implementation, which would be taking care of things at gaining bases, taking care of environmental problems on bases that are being closed, and things of that nature.
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Another factor that is important to mention is this, when the concept was started, there was a belief/assumption that the property was valuable that the department had, and that there were going to be opportunities for land sales and that those would help to defray the cost. What happened pretty quickly after they got into the process they found that that was not the case, and I think to date the Department has only sold about $200 million in property, and really we are in a process where sale of property is the option of last resort.
In other words, everybody has an opportunity, a shot at that property, to include other Federal facilities, States, local communities; and once that is exhausted, then the property becomes available for sale. So at this point in time, the Department does not even estimate any opportunities for land sales to defray cost of closures. So those are some of the key factors we have seen.
Mr. CHAMBLISS. I am familiar, of course, with your report on Newark that you referenced there earlier and also your depot report, and the one question that I would have, and I do not think it requires you to go into any detail on it, is I keep hearing from the Air Force that some wrong assumptions were used. Has anybody in the Air Force ever come to you and said, hey, ya'll used the wrong assumptions here; do not take the figures we gave you, use these other figures?
Mr. WARREN. I think in fairness that has been a continuing debate. This was discussed at hearings that we had last year, and we have been told that, and we have requested on several occasions for the Department to provide us with, in essence, what they believe are the right assumptions and right numbers, and that we would be happy to look at that and analyze it and to see if, in fact, our analysis is flawed. The difficulty is we have not been presented with that analysis, but, yes, that discussion is out there. But I guess in my line of work I need something to take a look at to audit.
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Mr. CHAMBLISS. You have asked for the numbers and they just have not given them to you?
Mr. WARREN. Yes, sir.
Mr. CHAMBLISS. Thank you.
Mr. BATEMAN. Mr. Taylor.
Mr. TAYLOR. Mr. Chairman, if you do not mind, I would like to reserve my time.
Mr. BATEMAN. OK. Mr. Riley.
Mr. RILEY. Mr. Chairman, let me reserve my time.
Mr. BATEMAN. OK. Mr. Pickett.
Mr. PICKETT. Thank you, Mr. Chairman. Mr. Warren, on page two of your report, you state that we question the magnitude of large scale savings projections cited in various DOD studies and view with caution the services' current savings projection. That is your view today about where we are in the process of privatization?
Mr. WARREN. With regard to the three initiatives. We looked at the A–76 effort they have underway, and we looked at the proposals put forth by the Defense Science Board and by the CORM to give some general sense for the committee as to the confidence that they should be placing. The Defense Science Board said $30 billion in savings. The CORM said potential for $3 billion in savings.
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Mr. PICKETT. In your work in this regard, have you given as much weight to the opinions and feelings of the people in the field that actually execute the programs as you have to the people over in the Pentagon that think about them?
Mr. WARREN. You mean in terms of going out and talking to individual installations and bases, sir?
Mr. PICKETT. Yes.
Mr. WARREN. Yes, we have, and we just recently issued a report that dealt with base support activities. I would like to let Mr. Holman speak a little bit about that. He directly visited some of the bases and could give some insight if that would be useful to you or——
Mr. PICKETT. Well, no, let me. The point I want to make is this. Just over a week ago, the chairman held a public hearing in Hampton, VA, at Langley Air Force Base, and one of the witnesses there, and I will not put his name in the record, but he had responsibility for a large segment of military operations, stated that in his experience, contracting out is kind of a phony sort of savings because once you execute a contract with a private contractor and lose the capability to perform that function in-house, that the cost inevitably goes up, and not unlikely becomes more than what it cost to do that function in-house. Have you done any work in that regard?
Mr. WARREN. OK. We have done some general things in that regard. I think the key thing that we have seen there, and I would not say that that statement that was provided represents what you see across the board. They key thing that we have found is if there is an effective competition for the activity or function that is being outsourced that, in fact, that competition can drive down costs. To the extent that that competition does not exist, then you can run into problems. Other things that have been brought up to us is that when they go into the A–76 process, the commanders will say we did not do a good job of writing our statement of work. We really needed to have this, this and this, but when we put it out there, we did not realize that, and so, therefore, when we recompeted the contract, we had to go expand the statement of work to really get the full range of services that we were receiving previously and our costs went up. So those are some of the kinds of comments that we are getting.
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Mr. PICKETT. Well, the policy issue that troubles me is this. It was alluded to, I believe, by Mr. Sisisky, and that is that we have taken this money out up-front and told people you can do it for less, and in some cases it is going to end up costing more. So where are the commanders in the field supposed to get the resources to discharge their responsibilities under these kinds of circumstances when the people making the decisions do not fully understand the consequences in the field of what these policy decisions are?
Mr. WARREN. We have also had concerns expressed to us along that line, and what happens is that they defer things.
Mr. PICKETT. Oh, I understand.
Mr. WARREN. And one of the key things——
Mr. PICKETT. That is how we get in trouble.
Mr. WARREN. Yes, sir, and one of the key things that we have been told that is being deferred along with these cuts, to accommodate these cuts, is real property maintenance so that, in fact, that is one way they get the money we are being told.
Mr. PICKETT. Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. Pickett. Next, Mr. Hansen.
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Mr. HANSEN. Thank you, Mr. Chairman. I appreciate your holding this hearing. I wonder why we are even holding it, though. If the administration had not violated the law, we would not be doing this. As I look at the BRAC Commission report, I think anybody that could argue in a JP court could read that. It makes it abundantly clear how this is supposed to work, who does what, as you go through the steps. I am still waiting for the Pentagon. I have asked Bill Perry, John White. Chairman Spence has done the same thing in asking them to furnish us a legal opinion of where the White House can privatize under the BRAC law? They say they have an either/or. They say we can either close or privatize. It does not say that in the law at all. I am not laying that on you folks, but it does not say that.
They can privatize outside of it, but they cannot privatize in place. How that happened, we took it upon ourselves to communicate with every BRAC Commissioner and everyone of them that we have talked to agreed with us from the chairman on down. But if that is the way these guys want to play the game because it is so politically inspired, it is nauseating; but anyway they won California and won the election so why are we still doing this? I do not know, but I guess you did not look into that.
But as I read your report, I compliment you on what you did, and if I read this thing right, the first thing you are talking about is how costly it is to have excess capacity. I do not see how anyone can justify that. I compliment the Navy. I remember Admiral Boorda in my office two or three times talking about closing his six depots, taking the remaining three, and now they are operated at a pretty high capacity and doing what they are supposed to do, and I think they did a good job. The savings from privatization, I think, as I read your report, are vastly overstated by the Air Force. I do not think there is any question. I think Newark is a great example of it is not working, and I have talked to some of the auditors who have been looking at Newark, and apparently it is costing big, big bucks, and we are getting nothing out of it. And the real savings is reengineering, consolidation, and competition. Is that right?
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Mr. WARREN. Yes, we, that is where we have found the greatest opportunities for savings. I would also—consolidation/elimination of excess capacity, yes, sir.
Mr. HANSEN. Now, I think a lot of us, especially those from the depot caucus, we are not against privatization. We think it makes a lot of sense. We just strongly disagree with some of the people over in the Pentagon that want to privatize the world right now. We think that somewhere that core work ought to be defined. If I could ask all these military folks here to give me a definition of core work, we will have 15 different definitions of it. It is like asking the Forest Service to give you a definition of ecosystems. They have all got a different definition.
Anyway, I think core work has got to be defined. I do not think any of us are hard over on the 60/40 bit. I think we would be happy to give that up if someone would define it.
I think it is hilarious that McClellan Air Force Base last year had 63 percent core work and this year they have zero, and nothing has changed except somebody made a redefinition of the term. It is ridiculous to me. I cannot believe that. Anyway, you folks want to violate the law, I guess that is all right, but I sure disagree with you. But just let me ask you this question. This is all true—would you agree that it is not privatization and outsourcing that holds the greatest potential for savings but rather adopting best business practices to the public sector including consolidation, shedding of excess capacity, and introduction of real competition? Is that a true statement?
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Mr. WARREN. Yes, in general. But if I could give you a little framework, I think it would be helpful. What we have seen from our private sector experience, we have had an opportunity to do some benchmarking with companies in terms of how they go about reengineering, and it is kind of a three-level thing that has to occur. First, you get rid of your excess capacity. Then you go in and reengineer what is left, get that down to the most efficient set of processes you can. Then you take a look at, OK, what do we really want to have as our core business processes, make some decisions there, and the things that you do not, go out and compete the devil out of them where it is possible to drive costs further down. And that to me seems, as I said, I think that has got to be part of this kind of overall strategic framework that is laid out so there is a rational process for getting to the savings that are clearly needed. So I phrased just what you had there a little bit different way, but I think it is in concert with what you were saying.
Mr. HANSEN. I have had some of these folks who wear the blue uniform of the Air Force tell me that your figures are flawed. I have heard that your figures came from the Air Force. Who is wrong?
Mr. WARREN. Well, of course, I think I am right, but——
Mr. BATEMAN. None of us would be shocked at that. I think now we have to turn to Mr. Underwood.
Mr. UNDERWOOD. Thank you, Mr. Chairman, and I am one of those members who similarly am not opposed to privatization but always seem to be one of the areas where we are consistently victimized by it. I read in your report about the A–76 studies that savings estimates represented projected rather than realized cost of competitions were not included, baseline cost estimates are lost over time, actual savings have not been tracked, and where audited projected savings have not been achieved, and in some cases where contracted out was actually more expensive than estimated before privatization. I would be very interested in hearing how we could make this process work, indeed, if we can at all.
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Mr. WARREN. I think in terms of the process can work in terms of bringing integrity to it to do the types of things, kind of the negative. In other words, bring into play all of those things that we are talking about that have been absent in the past studies. You need to have good baseline information on what your activities are costing you now. You need to do a strong comparison against what others might be able to provide. You need to put that in place. You need to track it and see if it really works. If it does, go after it and do more.
Mr. UNDERWOOD. Is it fair to assume, because I have talked to people who have been involved, people in uniform who have been involved in this kind of process, and I appreciate what you are talking about in terms of having more reliable data and having better benchmarks from which to triangulate our decisions and assess those decisions, but you know it seems if the DOD is interested in rewarding individual commanders for pursuing these kinds of activities or if there is some kind of institutional ethos that is pushing it in this direction, it seems that all of these benchmarks and all this collection of data, we will end up with reports that state exactly this regardless of what we do.
Mr. WARREN. Well, obviously that is possible in the scenario that you lay out. I guess I think what we have to hope integrity in the processes would be put in place. If there is agreement within the department and with the Congress that this is the way we are going to proceed, I would hope that we could have confidence and go forward and do those in a way that when we are finished, everybody would say, yes, this is the right answer regardless of how it came out.
Mr. UNDERWOOD. Thank you, Mr. Chairman.
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Mr. BATEMAN. Thank you, Mr. Underwood.
Mr. TAYLOR. Mr. Chairman.
Mr. BATEMAN. Yes.
Mr. TAYLOR. May I claim my time now?
Mr. BATEMAN. You surely may.
Mr. TAYLOR. Thank you, sir. Mr. Warren, you do not, at least through the first 30 pages of your testimony you do not come right out and say it, but you strongly alluded to the fact that if we were to close the books today on the three BRAC's, we have actually lost money, have we not? When you throw in the environmental clean-up costs, the money that has been given to communities to get their economies going again, money for unemployment benefits, the fact that we have not sold the property for anywhere near what we thought it was worth, if you had to close the books today on BRAC, have we not lost money as a nation?
Mr. WARREN. I think my best answer is I do not have that data available. It would be a separate analysis. I think what I am saying is it is taking longer to achieve those savings. In other words, but if your question is is if we—and I guess this is what you are saying—if we stop today, have we achieved net savings? I am not confident, fully confident, that that is the case, but I do not have the data to say one way or the other. What I can say is—I said earlier that from the bases that we looked at, clearly those savings are coming, and the efforts have been undertaken to close the bases and do the things that were necessary under BRAC. We are, in fact, going to reap savings, and they are going to be substantial. You are going to be talking into the billions of dollars. It is just taking longer to get there than we hoped; and again we started this process anew in 1988. I think a lot of people were trying to understand how do we do this best. There were a couple of pieces of legislation in order to put this into place, and were there to be future rounds of BRAC, we would be a little bit smarter and we would do things better and maybe we would get those savings a little bit quicker.
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Mr. TAYLOR. OK. May I, for the record——
Mr. WARREN. Yes.
Mr. TAYLOR [continuing]. Ask you if you were to close the books today on the three base closing rounds, for the record I would like to know where the balance sheet, and I want the total cost now, the money that the almost billion dollars has been given to the local communities to do something else, the environmental clean-up costs?
Mr. WARREN. And I am not trying to evade your question.
Mr. TAYLOR. OK.
Mr. WARREN. The difficulty is is I do not believe that data is available to give you that answer. The best I can do is——
Mr. TAYLOR. The arms initiative money. I mean there are so many programs out there that are a direct result of BRAC.
Mr. WARREN. Yes.
Mr. TAYLOR. That are a direct expenditure to the Nation. And I am asking you to look at all of those, and if you would get back to me, please, sir.
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Mr. WARREN. We will do the best we can.
[The information referred to can be found in the appendix beginning on page 823.]
Mr. TAYLOR. Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. Taylor. Mr. Riley, have you questions?
Mr. RILEY. Mr. Warren, just to follow up on what Mr. Taylor was saying, I would like your opinion on whether or not if the BRAC process had been fully implemented, could you answer his question in any more detail today? Or to put it another way, if we had fully implemented BRAC, how much more savings would we have to today than we do?
Mr. WARREN. In terms of, I guess, BRAC, as I understand it, is being fully implemented. Again, it is a timing, how long it is going to take to accomplish this. Now, as Mr. Hansen said, I guess there are some areas of disagreement, particularly as it relates to these privatization in place initiatives as to whether or not that represents a complete implementation of BRAC; and it sounds like that is going to be a legal issue on that determination. But again the work that we have seen has just taken a little bit longer to get some of these things done that were hoped for, and so what that is doing is pushing your savings stream out a little bit further.
Mr. RILEY. But does it not also represent the fact that instead of having 80- or 90-percent utilization of some of these facilities, we are still at 50- and 60-percent utilization?
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Mr. WARREN. OK. Let me speak to that, and maybe I did not understand fully your question. If BRAC, let us say the final round had dealt with all of those things that were out there remaining with regard to excess capacity and the need to make further reductions in base support and labs and other areas, we would be further, I would say we would be further along. I am sure this committee has had testimony over the past several weeks that many of the senior military members believe that there is a need for another BRAC because the job is not complete as it relates to excess capacity and how it lines up with the force structure. They are still telling us we have more than we need, and we need to deal with that because what is happening is that in good faith each of these military commanders are attempting to take the best care they can of their individual bases.
But it is kind of a suboptimum situation. They have got more bases than they need so they are doing as much as they can with scarce resources at each one of them, but it is not as much as actually needs to be done. So that creates a big problem. Does that get closer, sir, to what you were asking?
Mr. RILEY. Yes. Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. Riley. The chair has some further questions it would like to propound, but in view of the fact we have three other panels and numerous witnesses, I will submit mine for the record and suggest that if that is agreeable with Mr. Sisisky. Thank you very much, Mr. Warren, and Ms. Denman and Mr. Holman, we appreciate your being with us and your testimony, and we will have some questions for you for the record.
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Mr. WARREN. Thank you, sir.
[The questions and answers can be found in the appendix beginning on page 823.]
Mr. BATEMAN. We are pleased to welcome the members of the second panel, and first we will call on Mr. John Goodman, the Under Secretary of Defense for Industrial Affairs and Installations. Welcome, Mr. Goodman. We are pleased to have you.
STATEMENT OF JOHN B. GOODMAN, DEPUTY UNDER SECRETARY OF DEFENSE FOR INDUSTRIAL AFFAIRS AND INSTALLATIONS, DEPARTMENT OF DEFENSE
Mr. GOODMAN. Mr. Chairman and distinguished members of the subcommittee, I am very pleased to be testifying before this subcommittee for my first time, and I am delighted to discuss with you today the Department of Defense's efforts to introduce competition, outsourcing, and privatization to our commercial support activities today. With your permission, I have requested my complete statement be entered in the record.
Mr. BATEMAN. It will be, sir.
Mr. GOODMAN. Mr. Chairman, I would like to just briefly summarize my statement if I might. Improving our day-to-day operations, our support operations, is critical. It will help provide our troops with the best service at the lowest cost. This committee and its members have been important champions of this effort and much of my work would be impossible without your leadership, activism and support. As you know, the initiatives to adapt the best lessons of the private sector are occurring throughout the Department of Defense. Today, I would like to discuss the areas that are the focus of my job as Deputy Under Secretary of Industrial Affairs and Installations, principally housing and base commercial activities.
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The Department spends billions in support functions so the potential savings for us are significant. There are two strong stories I have to tell. One is about partnering with the private sector in military housing. The other is about the funds that we can save by introducing competition to the way we provide commercial activities, utilities, energy and other activities to bases. After my comments, my fellow panel members representing the services will give you more details about their programs and plans.
In response to the crisis in military housing, two-thirds of our houses require revitalization and replacement. Congress last year provided the Department with new authorities to engage the private sector in a new and creative solution. Our first year in implementing this initiative has been very successful. We have developed many of the tools required to act more like private sector developers including protocols for site visits, pro formas to conduct the financial analysis necessary to evaluate deals, new forms of guarantees, the ability to convey land.
Initially, we expected that our first year's projects would put 2,000 units in the development pipeline. In fact, we are doing significantly better than that. We now have six projects in various stages of development and one on which we have broken ground, involving more than 4,000 units, twice the number we had earlier projected. We are leveraging Government resources, at least three to one, and our goal is to expand the program and double the number of units in the pipeline next year. Right before Secretary Perry left the Department, I gave him a briefing on our status, and his comment on the program was that it was not as much as he had hoped, but it was more than he expected. Given his strong support for our troops and their quality of life and their housing, I considered that strong praise indeed.
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Competition provides important incentives for organizations to improve quality and reduce costs. Competition is what drives savings, not simply outsourcing. The Department is, therefore, seeking to increase competition in the provision of our commercial support activities. Let me stress that the Department is not pursuing any wholesale effort at outsourcing. Moreover, we believe that any decisions regarding specific actions must take into account particular concerns, missions and responsibilities of our Armed Forces. For this reason, the department has not mandated that certain activities be subject to competition. Our guidelines are clear. Activities can only be outsourced if in-house performance of that activity is not required to meet mission requirements, if the competitive commercial market exists for that activity and if outsourcing the activity will result in the best value. In other words, the least long-run cost for the Government.
We are not mandating competitions nor are we mandating any level of savings, and I think this may distinguish this effort from what occurred previously. We are counting on the services to use their best judgment and discretion about what makes sense. This is right and appropriate because the services are responsible for meeting their responsibilities and they will benefit from any of the savings. Our competitions are structured by the OMB A–76 process, which is designed to ensure that competitions occur in a fair manner. When we compete workloads in the A–76 process, our Government workers, our own workers, have an opportunity to help reengineer themselves, their activities into the most efficient organization instead of doing business as usual.
We have had extensive experience with A–76 competition. Between 1978 and 1994 we conducted more than 2,000 of them, and on those competitions we have saved an average of 30 percent or about a billion and a half dollars of savings per year. It is particularly important to note that Government teams have won those competitions about 50 percent of the time. Let me repeat. Our objective is to improve performance and lower cost, not to replace Government workers with contractors.
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Of course, when the private sector wins, our employees are affected, and we are working and need to work to assist them. Our programs such as priority placement have helped keep involuntary separations down to less than 9 percent over the past 6 years. And under A–76, our employees have a right of first refusal on any contractor jobs created. A–76 studies have been conducted to date on activities equaling about 82,000 work years. About 320,000 are still eligible to be studied for competition, which means significant savings are possible. This year, the services have already announced studies involving approximately 34,000 man-years. By the end of FYDP, they estimate that those savings will be worth about $2 billion a year.
Those activities involve commercial nondepot activities. I would note that these numbers are significantly lower than those that were proposed by the Defense Science Board because the services are undertaking and programming what they believe will be achievable. Mr. Chairman, my colleagues can tell you more about their own plans and activities, and with your permission, I will pass the mike to General House.
[The statement of Mr. Goodman can be found in the appendix on page 688.]
Mr. BATEMAN. Very well. General House, we would be pleased to hear from you.
STATEMENT OF MAJ. GEN. RANDOLPH W. HOUSE, ASSISTANT CHIEF OF STAFF FOR INSTALLATIONS MANAGEMENT, DEPARTMENT OF THE ARMY
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General HOUSE. Thank you. Mr. Chairman and members of the committee, I am pleased to have the opportunity to meet with you and discuss some of the Army's initiatives in the areas of outsourcing and privatization. I have a formal statement that I would like to submit for the record, and I would like just to make a few comments at this time.
Mr. BATEMAN. All of your written statements will be made a part of the record without objection.
General HOUSE. Thank you. We believe the state of the art has advanced that we can capitalize on some real opportunities to apply private sector competition, capital, technology, and expertise in our efforts to improve the efficiencies of our commercial activities on our Army posts. The Army has had success and gained experience in this area. Savings of around $4 billion have been experienced since 1979 to 1996 timeframe. We have learned from those experiences, and based on our history, we are adopting an approach that combines optimism with caution, optimism that there is more potential for improved efficiencies, caution that we must proceed with careful analysis and due process.
I would like to stress that the initiatives we are now undertaking will not give us substantive return until after the analysis is complete and actions, either outsourcing or conversion to streamlined in-house activities, are implemented. I would also like to point out that in many cases the returns that we expect are in terms of better quality, responsiveness of service or cost avoidance; and the gains will not necessarily translate directly into dollar savings.
The foundation of our program is competition, the principle that the market forces breed efficiency. That is what will give us the better value, not simply outsourcing. And I would hasten to add, as Mr. Goodman did, that competition includes Government in-house activities almost 50 percent of the time. The streamlined in-house work forces have turned out to be the more efficient provider and thus winner of the competition. We believe that is what a fully competitive process is. We are committed to refine that process so it works as fairly and judiciously as possible.
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Now to give you some idea where we are going in the area of commercial activity studies, fiscal year 1997, we plan to spend about $10 million on outsourcing studies of just under 10,000 positions, and we are developing plans to look at more positions in coming years. One of the most interesting current studies includes all installation logistics and public works functions at our installations in Training and Doctrine Command [TRADOC]. This study, which the contract was just awarded in February, may enable us to learn about ways to achieve regionalization efficiencies that have previously eluded us.
We are moving out to privatize family housing operations. We have issued a request for proposal in December for family housing at Fort Carson, asking for offers to build 840 new sets of quarters, revitalizing 1,800 existing ones, and to operate and maintain those homes for 50 years. This is an example of a project where direct dollar savings may not materialize. Instead, what we gain is the ability to revitalize Fort Carson's housing in about 5 years rather than taking up to 60 years if we stayed on our current track. More than a dozen similar projects are moving toward this stage at this time.
Additionally, we have a goal of privatizing 100 percent of our natural gas systems and about 75 percent of our other utilities systems by 2003. We are moving toward the goal with 12 systems successfully transferred and 8 others in the process of being transferred. We are also putting together public-private venture projects in the morale, welfare, and recreation facilities. We expect partnering initiatives like these will improve efficiency while keeping our quality of life promises to our soldiers and their families.
The future holds additional opportunities as well. Our three U.S. based commands will each study the outsourcing of whole base services in an omnibus contract at one installation. This will give us a template for future looks at whole-base contracting. Mr. Chairman, in closing, I would like to emphasize the Army's leadership is committed to the principles and recommendations in the studies like those of the Roles and Mission Commission and the Defense Science Board. However, we look to complete commercial activities not for the sake of contracting out but for the sake of efficiency. We will do it when and where it makes sense, and we will do it with a careful eye on readiness implications. Sir, this ends my statement. We welcome any questions from the committee.
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[The prepared statement of General House can be found in the appendix on page 695.]
Mr. BATEMAN. Thank you, General House. Admiral Scudi. I hope I have pronounced that correctly.
STATEMENT OF REAR ADM. JOHN T. SCUDI, DIRECTOR OF SHORE INSTALLATION MANAGEMENT, DEPARTMENT OF THE NAVY
Admiral SCUDI. You did, sir. My Italian landlord called me Scudi for years. It is Scudi. I thank you, sir, and members for the opportunity to discuss the vision of how we expect to get cash out of the infrastructure for what we call the reinvestment accounts for our continued superb readiness around the world. The Navy is, as you know, everyday, around the clock, around the world, and future readiness is what we are most concerned with here in the room.
We believe that the infrastructure cost reduction is best done region by region, that all politics is local, that regionalization and consolidation and understanding that infrastructure that would support the weapons systems post-BRAC is the first thing we need to do. As you may well know, we have started regionalization studies and collecting data to just see how we provide that support in some of our key fleet concentration areas.
To improve our operational procedures and use best business practices as was directed by the Government Performance Results Act, we are of the opinion that we need to work on activity based costing, unit costing, at least, so that we know the cost of things, and we have worked to start a measures and standards process to do that. Only after the regionalization, understanding the support for those weapon systems that will be there post-BRAC, region by region, and only after we understand the cost to do those, would we start and follow our initiative to do smart things at smart bases. We have started to use, as was mentioned, public-private ventures in housing, Corpus Christi and others. We are looking at the increased allowances that were supported for E–5's and E–6's. All that work is important to supporting that infrastructure that is going to give us the best value for the dollar to support the sailor.
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Only then do we talk about shared use, community use, joint ventures, outsourcing, A–76. We were working with the unions in our original establishment of an outsourcing support office to develop a desk guide so that it would be very clear that the statement of work, whether it is completed and we win it internally or externally, was clear in that we absolutely intend to follow the letter of law, notification, follow the statutes for congressional notification as we go through this process; and we certainly will be working a region by region as well as a national plan of action and milestones and would like to share those with you as they evolve. Again, we in the Navy stand ready for questions when it is appropriate. We thank you, sir.
[The prepared statement of Admiral Scudi can be found in the appendix on page 701.]
Mr. BATEMAN. Thank you, Admiral Scudi. Next we have General Cameron.
STATEMENT OF BRIG. GEN. HUGH CAMERON, COMMANDER, AIR FORCE CENTER FOR QUALITY AND MANAGEMENT INNOVATIONS, DEPARTMENT OF THE AIR FORCE
General CAMERON. Mr. Chairman and members of this committee, it is an honor for me to appear before you today to discuss your Air Force's program for outsourcing and privatization. The Air Force outsourcing and privatization program is an avenue for meeting three major challenges faced by the Department of Defense and the Air Force: readiness, quality of life, and modernization. Outsourcing and privatization is seen as an opportunity for meeting our strategic goals while generating savings for modernization. The Air Force takes a strategic view of outsourcing and privatization as a business oriented approach.
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The program is the central theme of the Air Force's vision, global engagement, and is supported by an overarching strategic plan and policy including purposes and goals. As noted in our vision, global engagement, the Air Force is committed to the organizational and cultural change represented by O&P, outsourcing and privatization, to make this vision a reality.
Our purpose is to institutionalize the Air Force's optimum use of both the public and private sector capabilities in selecting the best source through competition. And I must emphasize competition, either internal or external, to meet present or future Air Force requirements. It is competition which is critical for the success of our outsourcing and privatization program. We have three goals. First and foremost our goal is to sustain readiness. Second, to improve the performance, quality, efficiency, and cost effectiveness of our Air Force functions. And third, to generate savings for modernization.
Our approach to outsourcing and privatization impacts both our headquarters function as well as the field. In the air staff, we have institutionalized a corporate capability to assess and review the applications of our outsourcing privatization program. In doing so, we have enhanced our organic capability to examine and aggressively pursue smart outsourcing and privatization opportunities. To date, results are impressive. In commercial activities alone, we have as many studies planned for the next 6 years as we have done in the last 17 years.
This is a good start, but it is only a down payment for modernization. To ensure all outsourcing opportunities are explored, the Air Force will be closely examining each base function in its associated processes for outsourcing potential. The fiscal year 1998 to 2003 President's budget includes savings that reflect our strategic goals for outsourcing and privatization initiatives. In outsourcing, we have made progress, but we have a ways to go. To facilitate the process, we are developing decision tools that will aid in evaluating options and streamlining the process.
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In the arena of privatization, we are focusing on two main areas. The first is the feasibility of privatizing military family housing. A test is currently underway at Lackland Air Force Base, TX, to evaluate the potential for such savings in this approach. In this case, the contractors will constitute and maintain ownership of the housing units, and the Air Force members will lease them.
The second area being reviewed is the potential savings from divesting ourselves of on-base utility plants and equipment and turning to private companies for our utility needs. In conclusion, Mr. Chairman, I thank the committee for its strong support of the Air Force and for your time and interest this afternoon. The Air Force is encouraged about the possibilities inherent in outsourcing privatization, and we are organized to do it right. In this period of constrained resources, we believe that greater savings and measurable efficiencies are possible through selective outsourcing and privatization, helping us to achieve the Air Force vision for the 21st century.
By following through on the key objectives of this program and continuing to improve our mature commercial activities program, the Air Force is committed to establishing a benchmark program that supports our strategic goals. Sir, thank you for the opportunity to appear before you today, and I stand ready to answer your questions.
[The prepared statement of General Cameron can be found in the appendix on page 707.]
Mr. BATEMAN. Thank you, General Cameron. General Stewart, we look forward to hearing from you.
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STATEMENT OF MAJ. GEN. JOSEPH D. STEWART, DEPUTY CHIEF OF STAFF FOR INSTALLATIONS MANAGEMENT, U.S. MARINE CORPS
General STEWART. Mr. Chairman, members of the committee, I appreciate having the opportunity to appear before you today and would sincerely thank you on behalf of all the Marines for your continued support of the Marine Corps. As you all know, the Marine Corps does not spend a great deal of the Department's resources. Nevertheless, we are doing everything we can. We are striving to lower our costs as much as we possibly can and we think that outsourcing and privatization gives us the potential to be able to do that to help us along that road. At the same time, we want to make sure that we do not jeopardize our readiness, that we do not jeopardize our warfighting capabilities, that we do not jeopardize our expeditionary capabilities, that we are able to retain that capability to be the Nation's 911 force.
So for those reasons, we are moving into outsourcing and privatization with a tremendous amount of caution. Our focus has been on base commercial activities, not on core warfighting competence. When I say ''core,'' I mean C-O-R-E, core warfighting competencies. We have put together a strategic plan, and our plan includes spending about $34 million, a lot for us, over the next 4 years, starting in 1998, to identify those areas where we think that we can come up with some efficiencies on the base side of the house, not on the warfighting side of the house.
I think it is also important for me to note and to tell you all that we do a lot of outsourcing today. For example, in the Marine Corps, we have turned over the supply management of all of our consumable items to the Defense Logistics Agency, and we have essentially gone out of the consumable inventory control point business in the Marine Corps.
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We completely outsourced the maintenance of the equipment on our maritime preposition ships, our 13 ships, and we do that from a great facility in Blunt Island in Jacksonville, FL, a totally outsourced operation. We are using DLA'a prime vendor initiatives in subsistence and also in medical. And if you go on a Marine Corps base today you will not see warehouses full of food because we are getting that directly from the vendor through DLA contracts. We have also just started a new venture with DLA, another prime vendor initiative, that has the potential to get us out of the supply support business for facility maintenance. That is another prime vendor initiative, not the warfighting supply support business, but just the supply support for facilities maintenance on our bases and stations.
We have also recently just implemented a contract agreement with the General Services Administration which will get us out of owning our own passenger vehicles. So we are going to lease cars, passenger cars, vans, pickup trucks, buses, those kinds of things, from GSA, and we will not have to own our own vehicles. We think this is going to save us a lot of money. So, in summary, sir, I would say that we support outsourcing and privatization. We are certainly doing it with caution and we are going to do it in a way that it will not interfere with our capability to make marines and to win battles. Thank you, sir.
[The prepared statement of General Stewart can be found in the appendix on page 712.]
Mr. BATEMAN. Thank you, General Stewart. Thank all the members of the panel. I am encouraged to hear statements to the effect of we are not counting the savings until we achieve them, and yet that does not sound entirely consistent with some of the other things that I hear from other sources within the Department of Defense. General Cameron, you made reference to savings that were contemplated in the fiscal year 1998 to 2003 budget. It seems to me that somebody is predicating future defense budgets on the assumption that these savings are going to be realized. That does not seem to jive with the general thrust of testimony this afternoon that you are not counting the savings until they are, in fact, achieved.
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Admiral Scudi made reference to savings being applied to the reinvestment account, and we hear, that much of the modernization that is critical to our military capability and future readiness is to be taken care of by our doing business smarter and by our savings. Again, it seems to me a premise that this year's Defense budget and the next several Defense budgets are predicated upon savings not yet materialized. Would you comment on that?
Mr. GOODMAN. Mr. Chairman, perhaps I could take that question because we may have inadvertently given you the wrong impression, and if so, I apologize. The Department and the services are counting some of the savings in their outyear budgets. The activities that the services are initiating this year, of which they have notified you in their A–76 studies, cost money now. There are no savings associated with those funds probably until about fiscal year 1999. Any savings that we are now achieving this year are the result of efforts that we initiated 2 or 3 years ago. So there are savings identified in this budget. They are in the outyears. Services have dealt with that a little bit differently and perhaps they could address that. But the overall level of savings that they have identified, as the previous panel noted, is in and we believe is well within the realm of the achievable.
Mr. BATEMAN. General House, you made reference to I think $4 billion in savings by the Department of the Army from 1979 to present.
General HOUSE. Yes, sir.
Mr. BATEMAN. Could you furnish for the record that survey?
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General HOUSE. Yes, sir.
Mr. BATEMAN. Or those figures, and if comparable figures are available from the other services, we would like to have them.
Admiral SCUDI. Yes, sir.
Mr. BATEMAN. Perhaps with Mr. Warren being the clearinghouse or however you choose to handle it.
[Requested survey not furnished.]
Mr. BATEMAN. Mr. Sisisky.
Mr. SISISKY. Thank you, Mr. Chairman. I just might say that I feel a little more comfortable, Mr. Secretary, with you at the helm. I have watched your other work, and of course, I feel a little more comfortable but I am still uncomfortable. I have to be very honest. You know to say the President's budget, you just said that the President, he saved 200,000 jobs, took 200,000 people out of the work force, very good. He did not say how many he put in the work force on the other side under the private contractor, and that is the thing that I do not get in my mind. Is the pressure coming from the White House? Is the pressure coming from the Secretary of Defense or the Deputy Secretary of Defense, who I might add was chairman of the Commission on Privatization, so I mean that, I mean I—we are friendly enemies, not enemies. I should not say that, but I hope—so it is hard to be objective.
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Mr. GOODMAN. Especially when you are pointing at me, sir.
Mr. SISISKY. It is hard to be objective when you wrote the report. That is the only problem I have. Admiral Scudi, you know, you talked about infrastructure reduction and you also talked about doing it with national security. Now, I have had a running thing, and I am going to give you an example of somebody that you know pretty well, the former Secretary of the Navy, Secretary for a good while, but I am sure very few sailors know this gentleman today. You know if you run out of money, you cannot afford top quality, well-trained security personnel. So what you do is just say we got an open base. I am reading a thing in the paper that we have an open base at the Norfolk Naval Base, the largest naval base in the world.
And I ask the Deputy Secretary what does he think that base is there for? He did not know, and I told him it is there for war to train people for war. It is not there for pretty uniforms, clubs, anything else. Guess what? This former Secretary of Navy came out of a news release, drove through the gates of this base, drove to the piers, walked on board the U.S.S. Enterprise and the last time I looked it had eight nuclear reactors on that ship, eight nuclear reactors. God knows if anybody—I watch people spill blood on submarines at the Newport News Shipbuilding Co. and try to do it again when we just took the last aircraft carrier out of there.
This is what I worry about. I could tell you a story, what happened to me at the Pentagon, and all of a sudden you guys are in competition with Kmart in hiring security people. Privatization. It is a great thing. And it in some instances, and General House, you know what I am talking about in the instances. Of great concern to me has been Fort Pickett, and we did a privatization on petroleum pipeline. Now we are getting ready to expand into water it is working so well. Good contractor, but we had to price and we knew what it was.
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I do not know how you can prove anything, anything, unless you have the numbers to prove, and I mean real numbers. You know sometimes I wonder whether we lose sight of the thing that we can make, that we can make our Federal facilities a lot better by using business practices. I remember very well meeting with 12 different unions and superintendents and foremen at the Norfolk Naval Shipyard right after the 1993 BRAC, and I said I am going to tell you guys something. Unless you get your act together and get productivity up, you are going down the drain. You know what I found out? Superintendents never talked to labor, never talked to a guy that had a hammer in his hand. You know what they did? They brought in a good manager, a captain. They brought in a good manager and, man, you see that productivity go up and everybody starts talking to each other.
I am almost like a prophet. I could see this thing coming many years ago. I put in an amendment. I do not put in bills. I put in amendments. If you do not believe me, ask Mr. Hamre on DBOF, $70 billion a year, but I put an amendment and called it capital asset management thing. Now when it got to the Senate, we got lost in the conference, and I had it sunsetted. It was the only way I could do it. A very simple thing. Three percent of your business will go to buy new equipment. I came out of the business world. After I got elected, the first place I could visit was Norfolk Naval Shipyard. I could not believe—excuse me—the first place I visited was Newport News. The difference in equipment between Newport News Shipbuilding and the equipment at the Norfolk Naval Shipyard, unbelievable. And we are going to be competitive? How in the world? So we got great stuff in there now, you know, by using this account.
You know I asked the questions in my opening remarks and basically it is how confident are you that promised savings will be realized? We are not just supposed to talk about depots, but I can tell you something, I mean why I am suspicious as the devil. And the GAO was right in there. I asked a question when a contract was given. What are the numbers, what is the comparison? I called GAO, find that out for me. He says I already know. I said what are they? Zero. No numbers. No numbers. And a contract was going to be awarded.
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I threatened to sue personally the Secretary. Of course, 2 hours later they canceled it, but guess what happened? Two weeks later they had all the numbers in the world. You think I believe those numbers? No way that I could believe those numbers. This is what is bothering me. If the directive is coming save numbers of people, save dollars, great. But let us be factual about the dollars. What are we really saving? I can, look, General Stewart, you put your finger right on it. Use caution, and we have not used caution up until now. The bottom line, as I always said, should be national security. The bottom line should be that.
And I am telling you if you do not use the programs that we have, the A–76, and all of these other things, Federal workers can be, but you know what is happening, the new Secretary of Defense that you remember came in front of the committee. I said it is unconscionable to do a RIF of Federal employees that have been working diligently and good, and the next day hire them back as temporary employees. It is unconscionable for this Government to do that. And I still say the same thing, and that is what is being done. Because by temporary employee, you know what happens? We do not have to get them any notice, we do not to have to do anything, just say do not come to work tomorrow.
That is my feeling about the thing, but what we have done to a good work force. People took Federal jobs for a couple of reasons: the pay was not too bad, but it was not good, had good benefits, but more important, it had job security, and they do not have that now, and I am telling we are going to live to regret that. We used to get the best and the brightest, but I am afraid that is not going to be there anymore. I have nothing, again, against privatization when it makes sense, but I also know something coming of the business world; I was a corporation for profit, and I am sure the companies that are getting these things are corporations for profit. I just give you that caution, not to say anybody would do something, and Mr. Goodman knows how I had to do that on the mergers and acquisition thing, not that I did not trust these companies on that, but I wanted to be sure that everything was right, and I thank you, Mr. Chairman.
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Mr. BATEMAN. Thank you, Mr. Sisisky. Anybody have any final comments they would like to make?
Mr. GOODMAN. Good question.
Mr. BATEMAN. Mr. Taylor, are you interested in a question?
Mr. TAYLOR. Only to make the observation that Mr. Sisisky and Moses are two of the best prophets. [Laughter.]
Mr. BATEMAN. Are they on tablets of stone? Mrs. Fowler.
Mrs. FOWLER. Thank you, Mr. Chairman. Well, following up on what Mr. Sisisky was saying, I have been very concerned, too, about the Department of Defense apparent willingness to contract out personnel even when savings are not indicated just to say they are reducing personnel. And in going through some of the testimony for today when I was looking at the GAO's testimony that was earlier, I want to just quote. They had in their testimony, they said, ''One senior command official in the Army stated that the need to reduce civilian positions is greater than the need to save money.''
This view was reinforced by the DOD Inspector General's 1995 report on cost growth, which noted that quote, ''The goal of downsizing the federal work force is widely perceived as placing DOD in a position of having to contract the services regardless of what is more desirable and cost effective.'' That is on pages 16 and 17 of their testimony. And then in looking through testimony we are going to have later, which is from AFGE, I found attached this very interesting memorandum dated June 26, 1996 from George A. Fisher, Jr., lieutenant general, U.S. Army, who was sending this to commander at Fort Hood talking about the commercial activities program, and while this is Army, I know it applies to all services. So I know this is happening across the board. It just happens I have Army examples here.
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And in this, they are talking about privatization, receiving more emphasis, trying to streamline support activities, et cetera. Quote: ''To ensure support of the Army's privatization effort we have established installation quotas. Based on a review of the fiscal year '95 commercial activities inventory, your fair share is 767 spaces. Now you have currently identified 645 spaces for study. We need you to increase the number of spaces identified for study by 122 in fiscal year '98.''
And then it goes on to say, ''DOD has informed the services and agencies that 'seed money' will become available beginning in fiscal year '97. These funds will be distributed in the amount of $1,000 per space based on,'' et cetera. Then, he has got a little handwritten note here at the bottom and any of you can pull this testimony. ''Tom, we are required to meet the Army's assigned requirement. For each function you select, a study leading to a contracted out decision. You are ahead of most everyone and just need a few more in '98.''
You know what is going on here? I mean this is terrible, and it is not just the Army. I know it is happening in every one of you because you have been mandated by DOD that you have got to reduce personnel, and it does not matter whether you are saving money or not. Would anyone like to comment on this?
Mr. GOODMAN. Mrs. Fowler, may I offer a general comment and then General House wants to add specific information about the Army. The A–76, if there are pressures on personnel, competition is not the best way to achieve them because through the A–76 process, our teams can win, and our Government workers will be doing the work. Reengineering, consolidation, figuring out smarter ways of doing our job internally may be the better way of achieving those goals, but the A–76 process that we use, that we have to use, we are using, does not allow us to identify specific numbers of people. You cannot do it.
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Mrs. FOWLER. Well, somebody had not informed the services of that because they are being told from DOD because this is stating, they are quoting from the DOD that they had been given this number that they are to use. So there needs to be some review going on in-house as to what information is going to each branch of the services, because I am sure if I did digging, I could find similar memos for every single branch that is up here.
General HOUSE. Congressman Fowler, I have not seen that letter, but coming over here I was advised that it was out, and I have listened to what you have said. I know both of those generals very well. For the record, we will come back and try to do an analysis of what went on and come back. As an issue, though, of policy, what apparently you are reading is certainly not OSD or Army policy. And so there has to be some kind of a mix-up somewhere, and I will get back to you once I review that.
Mrs. FOWLER. I would appreciate that, and one thing you need to know that for the record, I am submitting some questions to the GAO, and one of the questions I am submitting to them is has the GAO or DOD gone back and audited actual savings or costs from work that is contracted out pursuant to these competitions once the contracts have matured? Is anyone going back? Because what I am hearing from some of my installations is people are riffed and then they are hired by contractors and we are paying more money. And according to what I am reading here and hearing, it certainly sounds like that is happening. So we need to see some information on it.
[The questions and answers can be found in the appendix beginning on page 823.]
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Mr. GOODMAN. Mr. Chairman, if I just might answer Congresswoman Fowler's question.
Mr. BATEMAN. Surely.
Mr. GOODMAN. We are required in the A–76 process to track data for 3 years. And we would welcome the opportunity to cooperate with the GAO. This is an issue that I have personally been concerned about. I have asked each of the services to follow up on this issue. There are a number of issues related to the GAO testimony on this point, but I think our track record there is actually pretty good. Sometimes what we find is that, and we find this in our own in-house work, that there is a change in the scope of the work over time, and so it appears that the contract costs more, but we are maybe getting a whole lot more service for it.
Ms. FOWLER. Thank you.
Mr. BATEMAN. Thank you, Ms. Fowler. Next on the list is Mr. McHale. Oh, I am sorry. If you would, it is Mr. Meehan. Sorry.
Mr. MEEHAN. Thank you, Mr. Chairman.
Mr. MCHALE. Can we debate that? [Laughter.]
Mr. MEEHAN. Thank you, Mr. Chairman. Mr. Goodman, I would like to first of all thank you for your testimony on how the Department is trying to adopt best business practices so it can become a leaner and more efficient organization. I can relate to your comments relative to competition. Obviously, the defense industry, as a whole, is trying to become a more efficient, more leaner, and post-cold war period. Part of that process will be through and has been through consolidations and mergers, and while I am not wholly comfortable with all of the mergers that we are witnessing, I am confident that most are necessary if the end result is going to be reducing procurement costs in a post-cold war period.
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Besides, leading the Department of Defense efforts in privatization and outsourcing, you are also, as it happens, to be a key player in the issue of mergers and acquisitions, and I was wondering if I could ask you, I have 5,000 of my constituents who are employed in the Raytheon Co. in Massachusetts both in Andover and Marlboro, and these 5,000 workers and their families feel as if they are kind of in limbo right now because the Department has been slow and some would argue dragging their feet on approving the Raytheon-Texas Instruments merger; and I have been told that the Department has delayed approval because of concerns that a merger between Raytheon and Texas Instruments would create a monopoly in MMIC technology, and while it is no doubt true that both Raytheon and Texas Instruments both produce high quality MMIC chips, I think it is also true that there are at least 24 MMIC suppliers in the United States, of which 16 support the Department of Defense.
And furthermore, I think it is true, and I would like you to comment on it, nine of these companies like Raytheon and Texas Instruments have high powered X-band power MMIC chips that are needed in fire control radars. Finally, and correct me if I am wrong, but is it not also true that there is a rapidly expanding commercial demand for MMIC chips in the communications industry, which clearly would ensure a strong industrial base for inexpensive high performance MMIC chips that I would think would emerge?
So I was wondering if you could comment on the status of your work on the merger and the concerns that I raise as well as any of the concerns the Department may have in terms of the issue of MMIC chips that I have outlined?
Mr. GOODMAN. Yes, sir. First of all, if I might, the Department of Defense does not actually approve any particular merger or acquisition. That is the job of the antitrust authorities. In the case of Raytheon's proposed acquisition of Texas Instruments, it is the Antitrust Division of the Department of Justice.
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Mr. MEEHAN. Excuse me just 1 second. I am aware of the process, and I have met with DOD and obviously talked to people at Justice about that process.
Mr. GOODMAN. I understand. Mr. Meehan, we had spoken together. I simply wanted to note that for the record because occasionally people do think that we do that, and, of course, our job is to review the transactions and provide input to the antitrust authority as the principal customer of these various items. When there is a proposed acquisition, we seek to identify every single area where the two companies involved are competing or may potentially compete.
In the case of Raytheon and Texas Instruments, the two companies are, in fact, competing in the area of MMIC's, monolithic microwave integrated circuits. We are reviewing that very closely. Let me assure you that we are not dragging our feet. We are seeking to provide every piece of information that we can to the Department of Justice. We are seeking to work expeditiously. This is a very difficult area, but we are working as fast as we possibly can because we know that this is an important issue for the workers, for the companies and it is an important issue for us as their customer.
Mr. MEEHAN. Mr. Chairman, if I could just ask one follow-up question. But you are aware that there are 24 MMIC suppliers in the United States, 16 of them which support the Department of Defense? I have kind of outlined the fact that it seems to me that the evidence is clear that this is not a monopoly situation, that while they may compete, there are 16 other suppliers, there is a private industrial explosion I think in that area. So I assume that you are aware of that, and that you have let the Justice Department know that as well?
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Mr. GOODMAN. We are looking closely at the entire market, at all producers, to try to determine what their capabilities are and their ability to meet our present and our future needs, precisely to determine whether we think there will be adequate competition in the future.
Mr. MEEHAN. Thank you.
Mr. BATEMAN. Mr. McHale. Maybe.
Mr. MCHALE. You are sure this time.
Mr. BATEMAN. I am positive.
Mr. MCHALE. All right. My question initially is going to be for Major General Stewart, but Mr. Goodman, I am going to have a follow-up on this issue for you as soon as I complete the initial portion with General Stewart. General Stewart, about 2 weeks ago I had the opportunity to meet with General McKissick, and we talked at some length. Actually I was then in uniform so he talked and I listened at some length on the subject of logistics and some of the innovative concepts that he is trying to bring to Marine Expeditionary Force [1MIF]. And basically, if I can summarize it in terms that at least capture the message for me, he emphasized a movement toward kind of L.L. Bean concept of logistics delivery, and that is a decreasing emphasis on Government storage and an increasing emphasis on private sector availability of goods guaranteed by contract, so rather than storing hugh quantities of material that we have traditionally done in the military, often with enormous waste attendant to that, instead General McKissick is trying to establish contractual relationships with businesses in the private sector where if a certain quantity of item would be needed under a given circumstance, there is a legal guarantee that that item would be delivered.
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As an example, he gave to me medical grade plastic tubing that had apparently for years been stored routinely under temperatures where that tubing would degrade and so the tubing would be bought, it would be stored in a military warehouse, it would degrade and over a million dollars worth of equipment would then be thrown away time and time again. Now they apparently have a contract that guarantees the delivery of sufficient tubing if the strategic circumstances would require it. Do you know anything about that program? And Mr. Goodman, my follow-up is going to be is that delivery concept of privately stored goods something that we are exploring throughout all of the services? I would welcome a comment—General House is nodding his head—welcome the comment from the other members of the panel as well. General Stewart.
General STEWART. Sir, what General McKissick is referring to is something that we are doing within the Marine Corps. We are calling it precision logistics. And what we are trying to do is essentially to reduce what we call logistics response times which is order ship time, the time that it takes to get material, the time that it takes to fix material. We call that repair cycle time. So we are trying to reduce all those times whether we get it through the private sector or whether we get it through the Government sector, whether we get it through the Defense Logistics Agency. We are doing everything we can to reduce those times; thereby we do not need to do just what you described, have material in our warehouses, and we are starting to see some tremendous gains from this.
We are using the private sector for some things like General McKissick is doing where it makes good sense to do that. On other things, we are just improving our processes, not, you know, kind of getting at some of the bureaucracy and making requisitions flow faster, receiving for things faster, and any time you reduce the order of ship time, of course, there is a complicated algorithm, but that algorithm is what you use to compute how much inventory that you hold. So if you can get it quicker, you have to hold considerably less.
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So what he is doing, he is really on the forefront of it out there at Camp Pendleton, but we are doing this throughout the Marine Corps.
Mr. MCHALE. It seems to me so long as you can guarantee the delivery of goods in a timeframe that is acceptable and with sufficient security to be certain that those goods will be available when you need them, avoiding that kind of storage responsibility on the part of the military makes a great deal of sense.
General STEWART. Yes, sir. That is a kind of less warfighting type supplies. We have done this for all of our mess halls. For example, we have done a prime vendor with Defense Logistics Agency. If you go into most bases now, you do not see warehouses full of food. We order it directly from the vendor when we need it. We are doing it with medical material. We are going to begin doing it with facilities, maintenance type supplies. So we think it has got a tremendous opportunity to reduce dollars and storage costs and so forth.
Mr. MCHALE. Mr. Chairman, may Mr. Goodman respond? I have no further questions.
Mr. BATEMAN. Yes, by all means. By all means.
Mr. GOODMAN. Mr. McHale, it is a DOD-wide program, The Defense Logistics Agency has innovated, it has introduced this direct prime vendor delivery program that we now use, as General Stewart noted, for food, pharmaceuticals, uniforms, increasing looking at things like construction items. Just to put some performance measurements here, in pharmaceuticals it has enabled us to reduce our turnaround time, our total delivery time, by about 75 percent so that we can now deliver pharmaceuticals to the user within a 24-hour period, which is best commercial standards; and it has cut our costs because we have reduced warehousing and distribution, cut our costs by about 25 percent. So it is a significant cost savings, even more importantly a significant performance improvement.
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Mr. MCHALE. Mr. Chairman, thank you. I am very impressed by those answers. Thank you very much.
Mr. BATEMAN. Thank you, Mr. McHale. Mr. Underwood.
Mr. UNDERWOOD. Thank you, Mr. Chairman, and thank you for this hearing again. My question is about whole base contracting, and in your testimony, Secretary Goodman, you state that DOD does not embrace and is not undertaking the wholesale outsourcing of support activities. We are undertaking a careful measure to approach the competition, and then I also note that in Admiral Scudi's—is that the correct pronunciation—he also made reference to the fact that the Navy decides a particular product or service can best be provided by the private sector. We must not shift toward a single product service provider.
But I also notice in General House's testimony, he talks about omnibus contracting, and so obviously to me that does not all seem to be the same thing, and they seem to be working at cross-purposes. But my question to you, Secretary Goodman, is has the Department of Defense done complete base operating contracts in the past? Are they contemplating doing them? Where are these base operating contracts at now?
Mr. GOODMAN. A number of the services have full base operating contracts. One is at Vance Air Force Base. I know there are others and my fellow panel members can speak to that. I do not believe, Mr. Underwood, that whole base contracting is the equivalent of wholesale outsourcing. We need to look at what benefits there may be in bringing together various functions so that they can be managed more efficiently. The GAO's report, at least the draft that I commented on, noted that that was one area where there was really a possibility of doing the job significantly better, and recommended to us that we consider, in fact, undertaking more of that.
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I know that the Army is looking at several of these cases. I believe each of the services are, but I would defer to the panel members to talk about their specific thoughts.
Mr. BATEMAN. Guam.
Mr. UNDERWOOD. Thank you. This committee is under the able leadership of the Virginia caucus. [Laughter.]
The question I am most interested in, obviously involves Guam, are they contemplating any whole base contracting as a result of this A–76 study?
Admiral SCUDI. There are two areas, Pensacola and Guam, that we have identified for regional multifunctional competition initiatives, primarily because they serve as a model. They would be representative. They could provide major economies of scale, but not take on major fleet concentrations like a Norfolk or San Diego. They have the additional benefit for us in the Navy to avoid the sea-shore rotation for sailors who are in what they consider remote or an expensive location.
Those initiatives are consistent with our internal discussion with the Defense Science Board and with the Secretary of Defense staff. They will again follow the rules and the protocols that we have talked about containing the congressional notification.
Mr. UNDERWOOD. But is whole base contracting part of that constellation of considerations?
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Admiral SCUDI. It would be multiple function contracting. For example, Diego Garcia does not have a very good sea-shore rotation. It is totally outsourced now.
Mr. UNDERWOOD. In Diego Garcia, do they use foreign workers?
Admiral SCUDI. Guamanians in Guam would obviously need this preferential opportunity to think that through.
Mr. UNDERWOOD. I mean I recognize the difference between Diego Garcia and Guam.
Admiral SCUDI. Not many residents in Diego Garcia.
Mr. UNDERWOOD. Pardon me?
Admiral SCUDI. I will have to get you an answer on the percentage of residents of Diego Garcia.
Mr. UNDERWOOD. Well, I definitely would like to rule out the possibility of using foreign workers on Guam. I want that clearly established because even though the model in Diego Garcia has been talked about by some people in uniform on Guam, it obviously is not comparable, and I want to rule it out.
Admiral SCUDI. It is not the exact model. We also have total support of our Strategic One Trident submarines first line of defense nuclear deterrence in Georgia and in Bangor. They are totally multiple function outsourced right now today.
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Mr. BATEMAN. Excuse me. Those bases were designed for that; am I correct?
Admiral SCUDI. Absolutely were. Absolutely were.
Mr. BATEMAN. That is the difference.
Admiral SCUDI. You are exactly right.
Mr. BATEMAN. They were designed for that.
Admiral SCUDI. You are exactly right. Forward fitting is always easier than backfitting. You are absolutely right.
Mr. UNDERWOOD. And Mr. Chairman, I have a few questions for the record, which I will submit.
Mr. BATEMAN. Very good, Mr. Underwood.
[The questions and answers can be found in the appendix beginning on page 823.]
Mr. BATEMAN. Everyone to this point has had a round of questions. Unless there is some urgent compelling reason, I would suggest Mrs. Fowler.
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Ms. FOWLER. Mr. Taylor first.
Mr. BATEMAN. Oh, Mr. Taylor.
Mr. TAYLOR. Mr. Chairman, I just have a very lengthy question for the record, if you do not mind, sir?
Mr. BATEMAN. OK. Very good.
[The questions and answers can be found in the appendix beginning on page 823.]
Mr. BATEMAN. Ms. Fowler?
Ms. FOWLER. And I just have a brief one that I would like to just put out there and then get responses from them for the record, if that is OK, and it does not deal with depots. I am speaking to the rule today so I am abiding by the rules. Just one other area that I do not think has come up in the testimony or in the questions and answers today that I am concerned about, I just want to get it on the record, and you can give your responses later really, is about our Defense Megacenter operations. While I agree that, you know, it does make sense to privatize some of our data processing or programming activities, I am very concerned about the implications of contracting out critical data processing functions, which to me should only be considered core.
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And in particular, I have noted that the DSB has proposed outsourcing automatic data processing business from four to six contract drawn facilities and getting DOD out of this business altogether; and that makes me uncomfortable because I think we need to meet the highest standards for security in our data processing functions, the ones that involve things like logistical support of our ground troops in Bosnia or our ships in the Persian Gulf. I mean these are critical, and they, in my opinion, come under the classification of inherently governmental functions. So I would just appreciate later for the record comments on that from you because I am concerned where we are going with that. Thank you.
[The questions and answers can be found in the appendix beginning on page 823.]
Mr. BATEMAN. Mr. McHale.
Mr. MCHALE. Mr. Chairman, if I may ask one question, the same question of Mr. Goodman and General Stewart. And I do not know what the answer to this question is, but I think there has to be some kind of systemic approach to it. I visit military bases frequently. I have been down to Camp Lejeune and Camp Pendleton often within the last year, and what I have discovered is that it is now routine practice to use a building far beyond its anticipated life expectancy, and then when it gets to be in such awful condition, deny it sufficient funds for renovation on the theory that it is about to be replaced—a bunch of white elephants out at Camp Pendleton that General Stewart is intimately familiar with. These are buildings that should have been torn down 15 years ago, were not torn down. Because they are scheduled to be torn down, you cannot get money to fix them up, and so they continue for a decade or more as eyesores.
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Down at Camp Lejeune, Second Engineering Battalion has Butler buildings that go back to the Second World War where literally the corrosion has now gone completely through the walls. You can look through the walls because the holes are so large. How do we deal with that? I mean how do we avoid the doubly-whammy of allowing the building to deteriorate and then use its deterioration as a justification not to provide funding to fix it up?
Mr. GOODMAN. We need to continue to focus attention on maintenance of the buildings and facilities that we do have and to ensure that we are putting our funds towards our really top priority needs, and we are asking our installation commanders to help identify that. It is an ongoing challenge in our current budget because we compete with other key elements of readiness. We, each of the services, are always really focusing on the whole issue of demolition, on buildings that we do not need, because the other part of the story is that if you have a building that you do not need and you leave it there, somebody will eventually fill it. There is no building that remains empty for a long period of time. And they create added costs that the installation then has to bear.
So we are also looking at finding those facilities that we truly do not need, demolishing them so that we reduce the ongoing O&M costs and being able to devote the resources to facilities that are really critical to the installation's performance and function.
Mr. MCHALE. I would suggest to you based on the functions that are located in these buildings that you do need those buildings or some other comparable structure to provide adequate workspace. And it just seems to me that I have now encountered the problem often enough in my own visits to military installations that there needs to be a systemic review of building demolition, what criteria will be applied for the demolition of a building, or in the alternative, what automatic source of funding will be provided to fix the building up and make it habitable? What we have now is the worst of both worlds where even a brief visit to a major installation will reveal that there are military tenants in buildings that ought to have been torn down two decades ago. Thank you, Mr. Chairman.
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Mr. BATEMAN. Thank you, Mr. McHale. In fairness to our last panel, I am going to suggest that members if they have any further questions submit them for the record, and we thank this panel for their testimony and appreciate your being here and sharing your information with us.
Mr. BATEMAN. The final panel this afternoon consists of Mr. Bobby L. Harnage, Sr., the national secretary-treasurer, American Federation of Government Employees, AFL-CIO; Mr. Stanley K. Kawaguchi, who is president of the American Consulting Engineers Council; Mr. Roy Cloudsdale, vice president, Global Business Delivery Systems, Integrated Facility Management, Johnson Controls, Inc.; Mr. Gary Engebretson, president, Contract Services Association of America; and Mr. Thomas L. Hewitt, president and CEO of Federal Sources, Inc.
If I may, I will call on you in the order in which you are seated there. Mr. Harnage, we would be happy to hear from you.
STATEMENT OF BOBBY L. HARNAGE, SR., NATIONAL SECRETARY-TREASURER, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL–CIO
Mr. HARNAGE. Mr. Chairman, and subcommittee members, my name is Bobby Harnage, and I am the national secretary-treasurer of the American Federation of Government Employees, AFL–CIO. As the largest Federal employee union, we represent over 700,000 Government workers serving worldwide including 300,000 who are employed by the Department of Defense. I ask that my written testimony be accepted for the record and that I provide the committee a brief oral summary.
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Mr. BATEMAN. All written statements will be accepted for the record.
Mr. HARNAGE. I would like to begin my testimony by thanking you, Mr. Chairman, for this chance to appear and testify regarding DOD reform and outsourcing initiatives. Hopefully, the subcommittee will agree to continue our dialog by permitting us the opportunity to testify in future hearings on depot maintenance privatization issues.
I also want to take this opportunity to recognize and thank the committee for its efforts last year in preventing the Pentagon's attempt to strike down the statutory safeguards of critical Federal defense work. On a personal note, I also want to express publicly my appreciation to the ranking minority member, Mr. Sisisky, who graciously met with AFGE's national leadership late last month to discuss privatization issues. It would be wrong to assume that AFGE's only interest in these discussions is to preserve Federal jobs. Just last month we signed a contract with a private sector firm, Hughes Aircraft, which would allow us to continue its representation of the employees at the recently converted Indianapolis Naval Air Warfare Center.
We were extensively involved in last year's long overdue reform of OMB Circular A–76. This reform effort resulted in a revised supplement to OMB Circular A–76. You will also be pleased to know that AFGE has been sponsoring labor-management training on A–76 competitive process. I would urge the committee to resist any attempt to exempt the Department of Defense from the competitive requirements of OMB Circular A–76 and its supplement. The recent reforms and visions in this document need time to take effect. I want you to know that we are constructively working with DOD in developing the reform initiatives.
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We have provided Mr. Longuemare, Principal Deputy Under Secretary of Defense, our comments on DOD's implementing instructions for A–76. We were in discussions with the Deputy Secretary of the Air Force, Rudy DeLeon, and General John Phillips, the Deputy Secretary of Defense for Logistics, regarding the workload at Kelly and McClellan Air Force Bases. Mr. DeLeon informed us of the Air Force's decision to accept an AFGE suggestion of permitting the Air Force depots to join in a teaming arrangement during the upcoming public-private competition for the work at Kelly and McClellan.
Mr. John Goodman, the Deputy Under Secretary of Defense for Industrial Affairs and Installations, who testified earlier, has requested our review and comment on DOD's draft policy, ''The Competition Between Public Sector Maintenance Depots and Private Sector Commercial Firms.'' Much work still has to be done. However, we are very hopeful. While we endeavor to seek workable solutions, sometimes there is impasse, or frankly the inability on the part of the senior officials to acknowledge the reality that their decisions run counter to the best interest of the national security or they are outright illegal. Such is the case in our recent litigation opposing the Pentagon's illegal privatization in place at Kelly and McClellan Air Force Bases, and more recently our lawsuit challenging the Department of the Army's illegal privatizations of artillery and tank production at the Rock Island Arsenal in Illinois.
In each of these cases, prior to resorting to the courts, we attempted to dissuade the Department from undertaking an ill-advised, counterproductive, and illegal action. However, in each case, we were unable to dissuade these officials, and therefore we were forced into the only recourse available, litigation. And left with no other options, AFGE will take to the courts to ensure redress and protection of the interests of Federal workers. We would be happy to discuss the status of both these lawsuits with your staff.
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I am greatly concerned over the effect of full-time equivalent, FTE, personnel ceilings have had on our Federal defense work force competitive environment and on our national readiness. Personnel ceilings are forcing some military bases to lay off their civilian employees and then to contract out their work at a higher cost. This problem is especially noticeable at service depots where Federal employees are getting reduction-in-force notices while planes, tanks, and ships await repairs. This condition, if permitted to continue, hurts the taxpayers who will pay more for less, degrades and demoralizes the workers supporting our forces in the field, devastates local economies and communities, and negatively impacts on our defense capability.
Recently I was provided a copy of correspondence between General Fisher, the Commander, Army Forces Command at Fort McPherson, GA, and the Commander of III Corps and Fort Hood, Kileen, TX. In his letter, General Fisher informed the Commander of Fort Hood that the installation's FTE installation ''has been increased from 645 to 767 spaces.'' To soften the blow a bit, General Fisher added a personalized note at the bottom of the correspondence, and I quote, ''Tom, we're required to meet the Army's assigned requirement. For each function you select, a study leading to a contract-out decision. You're ahead of most everyone; just need a few more in '98. George.''
Mr. Chairman, as a representative of Federal employees, I am shocked and offended by valuable Federal workers being treated impersonally as spaces in an anonymous quota system. As a taxpayer, I am offended to see the prostitution of the competitive system. The outcome of any competition at Fort Hood or elsewhere within Forces Command, for that matter, has already been decided in advance. I wish that I could say that this is an isolated case. Unfortunately, while it may be one of the more blatant cases, it is by no means unique.
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We strongly urge you to put teeth into the legislative remedies contained in prior authorization bills and hold hearings with the service chiefs appearing as witnesses. Let them come before you to acknowledge or deny that they are managing by FTE ceilings. Let them explain how they can create an artificial quota system that hobbles the public provider and still maintain an environment of competition. I also urge you to have GAO prepare a report documenting the compliance or noncompliance with your committee's statutory admonition.
In order to improve the environment of competition, I would strongly urge the committee to include language in this year's bill which would require DOD to conduct a post-contract award audit to ensure the Government is truly receiving the savings or efficiencies promised by the contractor in his bid. In the event the promised savings or performance are not realized or in cases of contract nonperformance or default, DOD would be required to report what action, such as recompetition or conversion to in-house performance, it is taking to correct the situation.
Mr. Chairman, we are willing to assist the committee in exploring this initiative and in drafting legislative language. Mr. Chairman, that concludes my testimony. I appreciate the opportunity to present it, and we look forward to working with you and your staff at this year's defense authorization bill markup.
[The prepared statement of Mr. Harnage can be found in the appendix on page 718.]
Mr. BATEMAN. Thank you very much, Mr. Harnage. Appreciate your being here and the testimony you have provided us. Mr. Engebretson. I hope I am not mispronouncing your name.
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STATEMENT OF GARY D. ENGEBRETSON, PRESIDENT, CONTRACT SERVICES ASSOCIATION OF AMERICA
Mr. ENGEBRETSON. You are doing fine, Mr. Chairman. Mr. Chairman and members of the committee, my name is Gary Engebretson, and I am the president of Contract Services Association of America. CSA is the Nation's oldest and largest association of Government service contractors. We represent more than 250 companies and tens of thousands of employees. Our members perform services of every conceivable type for virtually every agency of the Federal Government and scores of State and local governments.
I greatly appreciate the opportunity to be here today and to share with you our members' views on the question of outsourcing and privatization in a summarized statement. In thinking about this afternoon's hearing, I could not help but remember the last time I appeared before you. The last time I testified before this subcommittee, the issue being debated was not how much outsourcing would take place but, rather, whether any outsourcing would even be allowed. At that time, we had a moratorium on all contracts issued under OMB Circular A–76 at the Department of Defense.
Today, of course, the context of the debate is significantly different. Throughout the Government, including the Congress, there is an ever-increasing appreciation of the many benefits offered by a thoughtful and aggressive effort to competitively outsource the Government's commercial activities. Indeed, I am tempted to say that the debate over whether or not to outsource is over. Despite the rhetoric we hear from some corners, the fact is that the evidence is in, and it is overwhelmingly positive.
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The evidence shows clearly that competitively outsourcing commercial activities can save Government an average of 25 to 30 percent. The evidence shows clearly that the advent of commercial management skills and practices, the introduction of meaningful competition, saves money. The evidence convincingly reported recently by the Defense Science Board also shows that DOD alone, if all commercial activities were to be outsourced, the savings would be in the neighborhood of $30 billion.
Even if one disputes the optimism of the DSB report and assumes the unlikely possibility that the report overstated the potential by as much as 100 percent, the savings would still reach $15 billion. The impact and importance of outsourcing must also be placed in the context of the critical challenge facing the Department of Defense today. The Department and this committee are searching for ways in which to fund a much needed ramp-up in procurements to modernize and to ensure the maximum readiness of our Armed Forces. Outsourcing is one key tool that will help answer that challenge.
Thus, when asked if I believe DOD should move aggressively forward in outsourcing its commercial activities, I offer a glib but honest answer: how can DOD afford not to do so? DOD is, of course, moving in the right direction. Today, the department has 35,000 FTE under study through the A–76 process, more than at any time in history. Within the next year or two, that number is expected to at least double if DOD stays on course.
This is not to say we can declare victory and go home. The 35,000 FTE currently under study exists against a backdrop of an estimated 350,000 civilian FTE currently working at the DOD performing what are by definition commercial activities. This is why CSA has joined with a long list of other trade associations and professional organizations in endorsing H.R. 716, the Freedom From Government Competition Act, introduced by Congressman John Duncan. This bill would require that the Government competitively outsource its commercial activities where doing so is the best overall value to the taxpayer. Legislation also provides the reasonable exemptions and clearly recognizes the importance of appropriate soft-landing policies to those Federal employees who are impacted by an outsourcing decision.
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We urge this committee to lend its support to H.R. 716. Of course, our optimism notwithstanding, there remain a number of obstacles to overcome. For one thing, the A–76 process, while significantly improved in recent years, still does not genuinely ensure that the Department and the taxpayer gets the best value for their dollars. OMB has done an admirable job in revising the circular to improve the process, but despite the changes to A–76 and those required by the Government Performance Results Act, true cost comparisons remain illusive.
Second, sections 2461 and 2462 of title 10 continue to require that any decisions to outsource DOD activities be governed by cost only. If the Government offers the lowest cost, the work stays within the Government. Yet today throughout the Federal procurement process, source selection decisions among private offerors are routinely and appropriately being made on the basis of an assessment of all relevant costs and noncost factors, including past performance that recognizes that low cost does not always offer the true best value to taxpayers.
In addition to denying the taxpayer the best value for his dollar, these statutes create fundamental inequities when the public and private sectors compete. Our recommendation is really very simple: to amend those statutes so that reference best overall value to the taxpayer rather than low cost as the award determinant.
Third, we must recognize that while there is tremendous support for outsourcing at the leadership levels of DOD and within the services, the same level of support is not as evident in the command level and below. To combat that problem, we recommend that Congress consider providing incentives for base and facility officials to take greater advantage of outsourcing, potentially including and allowing individual facilities to retain a portion of the savings they generate.
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Fourth, this committee must once and for all eliminate the remaining barriers to smart management which prevent the Department from even considering outsourcing for certain functions. For example, firefighting and guard services are highly commercial functions and good management sense dictates that they be candidates for outsourcing.
Finally, I want to briefly address the treatment of Federal employees affected by decisions to outsource. There has been so much downsizing and reengineering in the private sector that we and our employees fully understand the concerns and the issues involved. We see it everyday. And we believe that it is important for the Congress and the Department to ensure that appropriate policies are in place to help mitigate against related negative impacts. This is not a one-size-fits-all issue. As I suspect my friends from AFGE realize since they now represent employees in both public and private sectors, the solutions that work in one area may not apply in another.
But it is an area in which the public and private sectors can and should put their heads together. We have a mutual interest in protecting the rights and the interests of public and private sector employees alike, and we should work together to fulfil our responsibilities in that area. Mr. Chairman, it is important that DOD move forward aggressively. To do so otherwise would simply be irresponsible. The benefits that are possible through outsourcing are enormous, important and needed more than ever before. I appreciate this opportunity to appear before this subcommittee and look forward to answering any of your questions, Mr. Chairman. Thank you.
[The prepared statement of Mr. Engebretson can be found in the appendix on page 740.]
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Mr. BATEMAN. Thank you, Mr. Engebretson, and now Mr. Kawaguchi.
STATEMENT OF STANLEY K. KAWAGUCHI, PRESIDENT, AMERICAN CONSULTING ENGINEERS COUNCIL
Mr. KAWAGUCHI. Thank you very much, Mr. Chairman, members of the subcommittee. I am Stan Kawaguchi, a registered Professional Engineer and vice president of Pacific Basin Operations for Parsons Brinckerhoff Quade and Dounglass, and I am actually based out of Honolulu, HI. So if you are ready to go this afternoon, I am at 11 a.m. in the morning. However, in the interest of time, I have prepared a summarized statement, and as I was sitting back there I realized the committee's time is precious. So I cut it down even more, and I hope it flows nicely.
Mr. BATEMAN. You are generous.
Mr. KAWAGUCHI. Thank you very much, sir. Today I come before you, actually in my role as the current president of the American Consulting Engineers Council or ACEC. ACEC is the largest national organization of engineers engaged in the independent private practice of consulting engineering. ACEC has more than 5,500 member firms or companies employing nearly 200,000 professional engineers, land surveyors, scientists, and technicians who design over $100 billion in construction projects annually. More than 75 percent of these firms are small businesses with fewer than 25 employees each.
Today I am here to present to the members of the subcommittee the consulting engineering community's observations, concerns, and recommendations with regard to outsourcing and privatization efforts by the Department of Defense and to express ACEC's support and endorsement of Congressman Duncan's bill, H.R. 716, the Freedom from Government Competition Act.
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The design professionals represented by ACEC provide professional engineering, design, environmental remediation, and other environmental consulting services to the Department of Defense and other Federal agencies. Our member firms maintain active relationships with a number of areas within DOD, particularly the Army Corps of Engineers, Naval Facilities Engineering Command, and the Department of the Air Force.
To its credit, DOD has really understood some of the problems within the A–76 system as was mentioned earlier in the previous panel, and has tried to streamline the studies and increase the accuracy of cost comparison process. Now of particular note has been the trend toward promoting best value practices, past performance measures and activity-based costing, or ABC as we refer to it, as a truer measurer during cost comparisons. These practices have been particularly welcomed by the engineering community as not only have our procurements been based on quality and past performance for over 20 years, but ABC finds hidden Government costs so the cost comparison is a lot more accurate. In other words, a level playing field.
It has long been our concern that, unlike the private sector, Government has not included an accounting of overhead costs in its comparison, items which the private sector is required to include, meaning that if you operate a business, the first prerequisite—Congressman Sisisky would understand this—is understanding what your costs are because you must recover your costs at a minimum. ABC will be required to be utilized by Federal agencies in the next 2 years, and ACEC certainly supports this effort.
Turning to the Defense Science Board, two recent studies by DSB have detailed this problem and outlined solutions that are available to the Department. As previously stated, it has always been the goal of ACEC and its members to provide the best quality work at the fastest delivery time. The November 1996 report by the DSB not only detailed many of the programs that are currently noncore related but detailed the fiscal and program realities that DOD now faces. The report states that current DOD support activities consume over 55 percent of DOD expenditures. However, these internal activities do not provide the responsiveness and flexibility available in the private sector.
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For example, the report outlines delivery times for DOD logistics. In procurement, administrative lead time at the Defense Logistics Agency stands at 88 days. Companies such as Texas Instruments and Boeing in the commercial sector take only 4 days to mere minutes to perform the same function. In personnel, over 80 percent of DOD personnel are in noncombat functions. Forty percent of active duty military are involved in infrastructure programs. In engineering alone, DOD and its agencies employ 59,000 engineers. Compare that to my 200,000 nationwide.
I would like to turn to the recommendations we have. Given the sheer size of the projected savings and the opportunity available to the Congress to set an example for Government-wide downsizing, ACEC would advocate to the committee the following recommendations:
Codify the definition of ''inherently governmental.'' Redefine ''core'' agency functions. Institutionalize activity-based costing. Limit the use of interservice support agreements. Rescind legislative limits on outsourcing certain activities. Establish personnel and program transition procedures within the DOD. Create structure to identify those functions that merit immediate outsourcing. Create a partnership with representatives of the Federal work force. Track outsourcing to develop data. Promote training and education of the procurement work force. And last, support H.R. 716, the 1997 Freedom from Government Competition Act.
In conclusion, Mr. Chairman, ACEC and its member firms have continuously endorsed the maintenance of a public-private partnership. It is only through this relationship that the private industry can provide the Government with the best quality and technologically capable work that our members can provide. Unfortunately, the ambiguity of current legislative authority and a scramble to redefine agency missions has left the private sector not as a partner but as a competitor. This situation can only be remedied by Members of Congress. Not only are the potential monetary savings potentially dramatic, but they will also assist in meeting the congressional goals for readiness and superiority for the DOD. ACEC stands ready to assist you in this process.
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Mr. Chairman, members of the subcommittee, thank you very much for this opportunity to testify, and certainly for a young man—I guess I consider myself a young man—from the islands, this is an exciting opportunity. I thank you very much, and I am prepared to answer any questions.
[The prepared statement of Mr. Kawaguchi can be found in the appendix on page 746.]
Mr. BATEMAN. Thank you very much, Mr. Kawaguchi, and Mr. Hewitt.
STATEMENT OF THOMAS L. HEWITT, PRESIDENT AND CEO, FEDERAL RESOURCES, INC.
Mr. HEWITT. Mr. Chairman and members of the subcommittee, I also appreciate the opportunity to appear before you today. I am here in my capacity as president of Federal Sources. We are a market research firm focused on information technology in Government. I am also here as a member of the Information Technology Association of America. I will summarize my comments that I have submitted for the record.
My testimony is based on a multiclient study that my company did on outsourcing opportunities within the Federal Government. It was a bottoms-up study. We looked at functions that we felt were candidates for outsourcing, functions that were dominated by information technology. In other words, functions that the information technology industry has and is performing today successfully. We found 122 such opportunities that had an annual potential revenue of about $26 billion a year. We believe that if all those functions were outsourced, there would be a savings to the Federal Government of over $4 billion a year.
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The DOD portion of that was $15 billion in revenue potential and a savings of $2.5 billion. I should also note that information technology represents less than 10 percent of the Federal Government's operating budget. However, it can be an enabler for substantial improvement in productivity and efficiency across the entire Federal Government operating budget. My testimony focuses on five points that I would like to summarize.
The first is that the Federal Government must embrace outsourcing. The reasons are, first, access to skilled information technology workers. There are now 190,000 information technology job openings across the country. In this northern Virginia area, there are over 10,000 we are told. We believe that the pain of those openings is soon going to be felt in DOD, the Government as well as the private sector. Governments across the world are successfully using outsourcing both at the Federal level or at the State level and the local level and countries such as Canada, Australia, New Zealand, and the European countries. The Fortune 500 companies are embracing outsourcing extensively. I believe that the Federal Government must embrace outsourcing to accomplish its core mission responsibilities in the year ahead.
Point No. 2: Outsourcing can and should be a win-win for everyone concerned. The cost savings, we believe, will be between 20 and 30 percent, and that is based on the numbers that we found in the Fortune 500 companies. Companies that have used outsourcing report substantial improvement in their ability to accomplish their mission in a dynamic environment. And most important, the clients' satisfaction with outsourcing has been reported as very encouraging.
Point No. 3: The conditions necessary for successfully outsourcing. First point, the business logic for outsourcing must be flawless. In other words, it must make sense and we must follow the rules. The political climate must be supportive. There must be a forcing factor to break the bureaucratic inertia, and that could be budget, it would be personnel, it could be this year 2000 date dilemma which is fast approaching. The business process reengineering should be introduced to assure that we do pick the right solutions for the right problems.
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The procurement culture, the thought process, should be directed toward the results, the objectives, rather than a detailed statement of work. I have got some cautions and observations as point No. 4. We think that A–76 is a biased relic of the past and it should simply be abolished. The Federal Government has not yet realized the value of information technology in improving productivity and efficiency. The past procurement systems created an adversarial relationship between government and industry. We think for outsourcing to be successful we need a partnership based on trust and confidence, and I believe that the Coyne-Clinger legislation moves the ball a long way in that direction.
In outsourcing, there will be reduced Government oversight, more responsibility in the hands of industry, and if outsourcing is to be successful, industry must perform at a high level and earn the right to assume that additional responsibility. Government should focus on policy. Industry should focus on performing the functions.
And my point five of the recommendations and conclusions: we think we should look to information technology outsourcing as a strategy for doing more with less, a means of achieving the savings necessary for a balanced budget. And last, we would recommend that the DOD carefully select 10 information technology opportunities for outsourcing this year, and the criteria ought to be where there is a comparable in the industry, there is clear evidence of cost savings, and there is absolute assurance of improved mission performance. Thank you for the opportunity of being here.
[The prepared statement of Mr. Hewitt can be found in the appendix on page 755.]
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Mr. BATEMAN. Thank you, Mr. Hewitt, and may I say we are approaching the 10-minute level for a vote that we have got to go and make. Unfortunately, there are two votes expected, and so we are in something perhaps as much as 30 minutes before we—well, no, maybe 20 minutes before we will be able to get back. Mr. Cloudsdale, I will return just as quickly as possible, if that be your preference, or you can submit your statement for the record, as you prefer. I certainly am happy to return in order that you can deliver your statement.
STATEMENT OF ROY CLOUDSDALE, VICE PRESIDENT, GLOBAL BUSINESS DELIVERY SYSTEMS, INTEGRATED FACILITY MANAGEMENT, JOHNSON CONTROLS, INC.
Mr. CLOUDSDALE. Mr. Chairman, do you want questions too later for the panel?
Mr. BATEMAN. I do not know that we are going to be able to do in the hearing room, but we do have questions to submit for the record, probably for each of you, but we are simply running into a time crunch in terms of being able to pursue the questions in the hearing itself. I do not want you to feel that I am not happy to come back in order to hear the presentation of your statement. I will be glad to do that, but in fairness to you, I wanted you to know that it may be 20 minutes before I can get back.
Mr. CLOUDSDALE. I think we will go for the record, please.
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Mr. BATEMAN. OK. I shall return.
Mr. CLOUDSDALE. No, for the record.
Mr. BATEMAN. Submit it for the record or you want me to return?
Mr. CLOUDSDALE. We will submit our statement, if that is OK.
[The prepared statement of Mr. Cloudsdale can be found in the appendix on page 768.]
Mr. BATEMAN. All right. Thank you, everybody. With that, we have a statement from the Association of Independent Engineering and Testing Firms (formerly ACIL). Without objection, it will be made a part of the record along with your statements, and we will have some questions to submit for your responses for the record.
[The statement of the Association of Independent Engineering and Testing Firms (formerly ACIL) can be found in the appendix on page 789.]
Mr. BATEMAN. Thank you. Sorry about the time constraints. The hearing is adjourned.
[Whereupon, at 4:30 p.m., the subcommittee adjourned.]
"The Official Committee record contains additional material here."
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"The Official Committee record contains additional material here."
QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD
March 12, 1997
QUESTIONS SUBMITTED BY MR. BATEMAN
Mr. BATEMAN. Mr. Warren, recently released the GAO report on outsourcing base operations notes the reduction in funding for real property maintenance on bases and personnel reductions. The report leaves the impression that our military bases may be in for a declining state of repair, and will continue to decline unless more is done to take care of these facilities. Based on your review, what is the potential impact that declining personnel and funding resources could have on estimates of outsourcing savings? In this environment is there a concern that funds may not be available to pay for outsourcing contracts once awarded? Given this state of affairs, what is the true savings potential from outsourcing of base operations?
Mr. WARREN. Our report notes that significant reductions in civilian personnel levels have occurred since fiscal year 1987 through fiscal year 1996, and those reductions are expected to continue in the coming years. Further, our work showed that even steeper reductions have occurred in funding for real property maintenance on military bases, creating a problem of deferred maintenance—one that is apt to cost more to deal with in the future. Thus, many service officials believe that service budgets and operations contain less fat today than may have existed in the past, and provide less of a base from which to obtain savings from outsourcing competitions than existed in the past.
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Until recently, many service officials have tended to view outsourcing contracts as ''must pay bills,'' similar to civilian pay. Now, however, some service officials are beginning to talk about the need to reduce the scope of existing contracts as budgets continue to shrink. Our report cited the example of the Air Force's Air Combat Command facing this dilemma. That concern was reinforced by the testimony of the Commander of that Command at the subcommittee's field hearing on March 3, 1997 in Langley, VA. The commander stated that ''funding for military construction and real property maintenance by contract has been cut to the bone, and perhaps beyond.'' Air Combat Command officials told us their funding for contracts for maintenance and repair jobs too large for in-house personnel will decline from $211 million in fiscal year 1996 to $6 million in fiscal year 1997. They expect the $6 million to decline to almost zero by fiscal year 1999. Officials at the U.S. Atlantic Fleet in Norfolk, Virginia, told us that funding reductions this year will cause them to begin scoping back existing outsourcing contracts. These reductions raise questions about the availability of future funding to maintain the level of service of current contracts as well as maintain needed levels of services in new outsourcing contracts.
Collectively, these factors suggest that the magnitude of savings potential from outsourcing competitions could be much less than attained in the past. Further, there is the potential for long-term costs to increase, whether continued in-house or contracted out, to deal with the needs and effect, of deferred maintenance and repair of facilities.
Mr. BATEMAN. Mr. Warren, your report on base operations also suggests that small business legislation could adversely affect the potential for omnibus contracting and larger outsourcing savings. In your opinion, how much of a problem is this? What is DOD doing to address this issue? What steps can be taken to minimize the negative impact on small businesses?
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Mr. WARREN. How much of a problem for outsourcing this situation will present remains to be seen since the services are just now gearing up for many of the planned outsourcing studies. Our report cites past problems encountered by the Air Force's Air Education and Training Command (AETC) in attempting to develop omnibus contracts. The Deputy Secretary of Defense issued a policy memorandum on October 28, 1996 that underscored the importance of small, small disadvantaged, and women-owned small businesses to DOD and the need to consider the impact on these groups in planning for the consolidation of several contracts or requirements into a single larger contract. Larger contracts such as omnibus contracts can exclude the participation of small businesses as the prime contractor because small businesses often do not have the capacity to meet all contract requirements. On the other hand, it is DOD policy to outsource under multi-function, or omnibus, contracts to realize larger savings and benefits, such as reduced overhead costs.
DOD's small business policy is based on statutes such as the Small Business Act and 10 U.S.C. 2323 which sets out a policy of fostering the participation of small business in federal contracting. More importantly, the Competition in Contracting Act requires that solicitations include specifications which permit full and open competition.
DOD officials told us the Department of Defense receives percentage goals which are passed on to the services and field levels. DOD's goal is to award 20 percent of prime contracts to small businesses. Some major commands may have higher goals based on their potential to outsource more to small businesses. For example, AETC's goals is to award roughly 40% of all prime contracts to small businesses. AETC officials told us they viewed the Small Business Act as an impediment to omnibus contracting.
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Within DOD, it is generally left up to field level commanders to decide whether to outsource through omnibus contracts. Historically, the principal action we are aware of to deal with outsourcing and small business goals is to aggregate related functions for outsourcing studies into smaller packages (sometimes referred to as mini-umbrella packages) to achieve some benefits of omnibus contracts while still providing the basis for meeting small business goals.
Mr. BATEMAN. Mr. Warren, your just released outsourcing report mentions the potential to save money from converting military to civilian positions. How much money are we talking about? If there is potential for savings, why are the services and Office of the Secretary of Defense (OSD) reluctant to do it? Will this require transfer of funding between the Military Personnel and Operations and Maintenance appropriation accounts?
Mr. WARREN. GAO's 1997 report on military/civilian conversions estimated that DOD could save $95 million annually through converting 9,500 positions. (This was based on reviewing 32,155 positions). Calculation of the potential cost savings was based on the average cost of military and federal civilian salary and benefits.
GAO's 1995 report on military/civilian conversion found that the cost difference between military and civilian personnel was $15,000 on average for persons of comparable grade. As our outsourcing report pointed out, DOD and the services have been reluctant to make such conversions in the current downsizing environment due to concerns about the adequacy of consistent funding for the hiring of civilian replacements, and the time required to program funding from the military personnel accounts to Operation and Maintenance accounts to pay for civilian or contractor personnel.
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Mr. BATEMAN. Mr. Warren, what happens if contract prices rise too much and service officials want to bring the outsourced function back in-house? Will they be able to do so, given personnel constraints?
Mr. WARREN. Various service officials have expressed concern that given the Department's strong emphasis on meeting personnel reduction targets, it may be difficult to bring activities back in-house once they have been outsourced. The Army encountered such a situation in the early 1990's at Fort Leonard Wood, Missouri. Officials there decided to return an outsourced function (logistics) to an in-house operation because of contract cost increases. After conducting a ''transfer cost study'' that concluded an in-house organization would cost less than the outsourced operation, the Army provided Fort Leonard-Wood additional funding to pay the salaries of 247 in-house workers—but did not provide the additional civilian authorizations.
Mr. BATEMAN. Mr. Warren, the recent GAO report on outsourcing of base operations discusses several impediments to outsourcing within DOD. Which of these impediments do you believe are the most serious? Would you recommend additional legislation to remove these impediments?
Mr. WARREN. Two impediments appear to have the greatest impact on limiting DOD's ability to generate the greatest savings from outsourcing competitions. They are (1) the perceived constraints of small business and other related legislation on the services' consideration of omnibus contracts and (2) the services' willingness and ability to fully consider and implement military to civilian conversions. Any legislation to deal with the first issue would involve policy tradeoffs against competing objectives. The second issue involves a number of considerations discussed here as well as in my response to question 3 above. Previous efforts to legislatively require military to civilian conversion were not entirely successful.
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Mr. BATEMAN. Mr. Warren, to what extent do personnel ceilings impact DOD managers' ability to implement cost-effective operations? What other barriers have stood in the way of implementing reengineering and efficiency improvement initiatives in the past?
Mr. WARREN. Various service officials have expressed concern that limitations on civilian end-strengths can sometimes limit their options for achieving savings where cost studies show that in-house operations are most cost-effective. I believe that this is a legitimate concern. To the extent that a manager determines that work could be performed more cost-effectively in-house, but he does not have sufficient manpower to accomplish the work using government employees, he would be required to contract out the work or to contract out some other work and transition the in-house personnel performing the second function to perform the first function. While I know of examples where both of those suboptimal solutions have been taken, I have no information that would tell me how great a problem this has been over time.
Other barriers that have stood in the way of implementing reengineering and efficiency initiatives in the past include service parochialism and institutional resistance to change. However, I think we are beginning to see a lessening of these barriers in the face of continuing budget reductions and increased senior level emphasis on finding ways of doing more with less. Additionally, DOD officials tell us that during recent downsizing, many of the personnel who would conduct reengineering/and efficiency studies were eliminated. They noted that these overhead positions were targeted for significant reduction and that these losses have inhibited managers from initiating some reengineering efforts they otherwise would have undertaken.
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Mr. BATEMAN. Mr. Warren, the Defense Science Board (DSB) recommended privatizing virtually all non-combat functions in the Department of Defense. What were the Board's basic assumptions regarding savings to be achieved from the outsourcing of various activities? How do the Board's assumptions regarding savings from outsourcing compare with the ones used by the Commission on Roles and Missions (CORM)? What do you think about the viability of reducing support costs by $30 billion through increased outsourcing? What are DOD's largest impediments to achieving the savings projected by the DSB?
Mr. WARREN. As mentioned in my testimony, we are still in the process of analyzing the DSB report. However, as noted in my testimony, the Defense Science Board's basic assumptions were that using best practices for achieving better, faster, lower-cost methods, the private sector can perform all support functions more cost-effectively than the public sector and that by outsourcing almost all support functions, over $30 billion could be reduced annually from defense infrastructure accounts by the year 2002. The DSB used a baseline of $140 billion for current defense infrastructure costs, and assumed savings of 20 to 40 percent. The savings were dependent on a reduction of about 5 percent per year in the civilian workforce and about 2 percent per year of military personnel over the next 5 years, as well as the completion of a series of base realignment and closure actions that would significantly reduce the existing DOD infrastructure.
The CORM recommended outsourcing all current and newly established commercial type services, noting that greater use of private market competition would lower DOD's support costs by 20 percent and improve performance. The CORM's and the DSB's savings assumptions were based largely on reported savings from public-private competitions for commercial activities conducted under the Office of Management and Budget (OMB) Circular A–76 program. Nonetheless, while the CORM and the DSB based their savings assumptions on OMB Circular A–76 data, both groups advocated revoking the circular.
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In general we agree that there are opportunities to achieve savings through additional base closures, reengineering initiatives, and outsourcing. However, we do not believe savings in the magnitude of $30 billion are likely to be achieved, given the current military force structure which must be supported. These savings projections were not supported by the DSB study and were based on favorable conditions that do not currently exist. We have found that outsourcing savings are dependent on or highly influenced by (1) the continual existence of a competitive market; (2) the ability to clearly define the task to be done and identify measures of cost and performance that can be readily evaluated using an effective contract vehicle; (3) the assumption that the private sector can do the required work more cost-effectively than a reengineered DOD activity; (4) the extent that commercial contracting and contract management practices can be applied to the outsourced activity; (5) the ability to reduce the existing public infrastructure and personnel costs associated with the outsourced activity. Further, the DSB savings assumptions may also include functions and activities that are determined to be core. Finally, while the DSB referred often to outsourcing competitively, it recommended total contractor logistic support for weapon systems—usually a sole source arrangement with the original equipment manufacturer. Lastly, they also assume that certain legislation related to outsourcing such as the 60/40 rule for depot maintenance workload would be revoked.
Mr. BATEMAN. Mr. Warren, your statement does not question whether opportunities for outsourcing some DOD support functions actually exists. You also stated that it is competition and reengineering, not just moving work to the private sector that generates savings. Does this mean that you would not support wholesale outsourcing without allowing public entities to compete as has been recommended by the Defense Science Board and the Commission on Roles and Missions?
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Mr. WARREN. Our position is that outsourcing should proceed within the framework of OMB circular A–76 and other legislation that specifically calls for competition between public and private sector work for government work. We also believe that it is important for DOD to competitively examine the cost benefit of various approaches to obtaining needed goods and services, whether it involves public/private competitions or competitions among private sector vendors. Our preliminary observations of private sector businesses considering outsourcing various support functions indicates that businesses first determine whether or not the functions are core or non-core functions. Then for those non-core functions they determine what would be the most efficient way to reengineer their in-house activity to establish a baseline for comparison with external organizations. Next, they evaluate whether or not the function or activity can be performed more cost-effectively by their reengineered in-house activity or by an external group. If the in-house option is determined to be the most cost-effective option, the function or activity is not outsourced.
A–76 competitions have demonstrated the importance of competition to identifying the most cost effective source of obtaining required services. Since approximately 50 percent of the A–76 competitions were won by in-house providers, the government likely would not have gotten the most cost effective alternative if competition had been limited to private sector providers. Further, the participation of public providers would have even greater impact on cost-effectiveness if the activities being evaluated for outsourcing do not have the highly competitive private sector market which existed for the A–76 base support competitions. For example, in our review of public-private competitions for depot maintenance, we found that frequently only one private sector offeror competed for the workloads being offered for competition. This and other work suggests that depot maintenance and some other defense activities do support a highly competitive private sector market.
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Commercial Activities Studies
Mr. BATEMAN. For all witness, historical data shows the smaller number of positions contracted out, the smaller the savings, i.e., Air Force data shows that functions with less than 25 workers generally show initial savings of only 13%. Conversely, functions with over 300 positions averaged 41 percent in initial savings. For Commercial Activities studies you've recently announced to the Congress, what is the median number of positions (military and civilians associated with each candidate study? Are the services emphasizing studies of larger functions or grouping of functions in order to realize larger savings? How many A–76 studies have involved OMNIBUS, multi-function, or complete base contract for base support? And which bases have been involved? The GAO report indicates that maintaining military rotational positions creates a problem with outsourcing base operations. How real is this problem?
Doctor GOODMAN. Our average study is 62 full-time equivalents (FTEs). Between 1978 and 1994, seven percent of the studies had more than 100 FTEs compared to 14 percent of the current announced studies. Over 70 percent of the FTEs planned for study involve over 100 FTEs. DoD only keeps data on size of studies being performed by FTE, not whether the study is multi-function. We do know there are base operations support type contracts at Fort Irwin, Kings Bay Naval Submarine base, Bangor Naval Submarine Base, Vance Air Force Base and Arnold Air Force Base.
Currently, Military rotational positions are not a problem, but the military departments will continue to review this area.
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Revised OMB Circular A–76 Procedures
Mr. BATEMAN. For all witnesses, since the inception, the OMB Circular A–76 process has been criticized as being complicated and time-consuming for federal agencies to implement. In response to this criticism, OMB recently revised the procedures for conducting public/private competitions under A–76. How does the Department view the recent changes to OMB's guidelines for conducting public/private competition? Will the changes make it easier and less time consuming for the Department to conduct these competitions? Does the Department have any recommendations for additional changes to the A–76 process or its implementation?
Doctor GOODMAN. Overall, the Department views OMB's changes as an improvement, but remains concerned about time and cost of studies. We are working with the military departments to implement the program effectively. We have developed software which makes it easier to develop the most efficient organization. In addition, the military departments have provided good performance work statements (PWS) through World Wide Web sites which assist other units in writing their PWS. The military departments have also reduced the time to complete the studies.
Impact of Eliminating or Waiving OMB Circular A–76
Mr. BATEMAN. For all witnesses, what impact would elimination or a waiver of the A–76 requirement have on the Departments outsourcing opportunities?
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Doctor GOODMAN. The OMB Circular A–76 process provides an agreed upon method of cost comparing in-house and contract performance. The elimination or waiver of the A–76 process would require the DoD to find other methods of completing cost comparisons so we could meet the requirements of sections 2461 and 2463 of title 10 USC and section 8015 of the fiscal year 1997 Appropriations act.
With the appeal of these sections of law and the elimination or waiver of the A–76 process, outsourcing of in-house work could be shortened about 60 days and the expenditure of resources to determine the most efficient and cost effective organization would be reduced. These actions would impact the morale of our workforce who would not have the ability to compete for these functions.
Gap in OMB Circular A–76 Experts
Mr. BATEMAN. For all witnesses, the GAO indicated that the number of A–76 experts in the Department dropped considerably at the end of the 1980s. What is DoD and the Services doing to fill this gap in knowledge? Has DoD or the Services reviewed the opportunity to consolidate A–76 personnel across the Services and Defense agencies?
Doctor GOODMAN. The Services and Defense Agencies have taken steps for better utilization of their resources to include supplementing them with contractor support, developing teams, provide training and provide computer software programs such as the Air Forces COMPARE program which automated some of the stubby pencil work. DoD has provided funding to the Air Force to upgrade this software to a Windows based environment and for distribution to all the military components requesting the software.
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Both DoD and the Services are looking for ways to make the process smoother and timely. Each service has their own way of doing this process so that a DoD organization would not benefit the overall process.
Commercial Activities
Mr. BATEMAN. Mr. Goodman: In its most recent report to the Committee on performance of commercial activities by the private sector, as required by section 2461, Title 10, U.S. Code, the Department indicated that only 8 percent of commercial activities were contracted-out by the Defense Agencies. In contrast, the Services contracted out anywhere from 32 to 65 percent of their commercial activities. Further, reports by groups outside of the Department have also cited a lack of outsourcing at DoD's Defense Agencies. Why are relatively few activities outsourced in Defense Agencies? What opportunities exist to expand outsourcing of commercial activities at Defense Agencies and what are the Department's plans to take advantage of these opportunities?
Doctor GOODMAN. During this past summer's preparation of the Program Objective Memorandums (POMs) the Defense Agencies were contacted to determine their participation in the Department's overall outsourcing and privatization efforts. All agencies who now have approximately 10.3 percent of their commercial activities contracted-out (6,000 of 58,000 work-years) are examining their opportunities to outsource. In addition to outsourcing, all Defense Agencies are heavily engaged in re-engineering and implementation of other efficiencies. We anticipate their level of outsourcing to increase.
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Cost to Perform Studies
Mr. BATEMAN. Mr. Goodman, the services recently announced plans for A–76 studies involving over 34,000 positions, beginning in fiscal year 1997, most of which are associated with base support activities. Over the next few years, DOD plans to compete over 100,000 positions for outsourcing and privatization. OSD has provided $14.5 million to the services to conduct initial A–76 studies. What is the projected cost to study the entire 100,000-plus positions? Where will DOD get the additional funding needed to pay for A–76 studies over the next few years? What are the services specific privatization plans? Is the Department considering waiving the A–76 process requirements? If so, for what functions? How will the Department ensure that activities not being subject to public-private competitions under OMB Circular A–76 save money for the taxpayer when contracted out?
Doctor GOODMAN. The Department has been using $2,000 per full-time equivalent (FTE) as a planning factor for the cost of studies. The Air Force has used organic capability while the Navy and Army are utilizing contractor support. With larger studies, the cost per FTE should be reduced. The Services have identified investment funding for their outsourcing and privatization efforts. Beyond the 34,000 FTEs already announced, the Services will study another 100,000 FTE but have not identified the functions or the civilian and military mix at this time.
The Services have the authority to issue waivers so the Department is not planning on issuing any waivers at this time. Currently no waivers have been issued.
The Department is working to ensure the funds spent on national defense are cost effective. One of those ways is to do some level of cost comparison whether using the A–76 process or a business case analysis.
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Outsourcing and Privatization
Mr. BATEMAN. Mr. Goodman. The Department's March 1996 report entitled, ''Improving the Combat Edge through Outsourcing'' defined three conditions which functions must meet if they are to be considered for outsourcing or privatization. Those three conditions are: (1) private sector firms must be able to perform the activity and meet war fighting mission requirements, (2) a competitive commercial market must exist, and (3) outsourcing must result in the best value to the government. What process or mechanisms does the Department have in place to ensure that these three conditions are met before a function is outsourced or privatized? What plans have been established to communicate these conditions throughout the Agency? What has the Department done to encourage privatization efforts throughout the Agencies and Services?
Doctor GOODMAN. Following the Department's guidelines, the Military Services have developed plans and management structures, for identifying and pursuing competition; outsourcing and privatization opportunities. While Service approaches differ, their processes all employ: (1) decision criteria/screening logic to ensure that a function is not inherently governmental or otherwise a core capability that must be performed by government personnel; (2) market research to ascertain that a competitive environment exists for the function and locale being considered; and, (3) the same principles of ''best value'' acquisition that are used to procure equipment and other materiel are also used when evaluating responses to solicitations for services.
The Department has created appropriate incentives for the Services; specifically directing that Service resources saved as a result of outsourcing and privatization initiatives would not be decremented from their outyear budgets. The Services consequently published their own incentive programs to provide local commanders a share of the savings generated by their efforts.
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Mr. BATEMAN. The fiscal year 1996 National Defense Authorization bill contained requirements for DoD to report on many infrasturture issues subject to reform. This committee has not yet received some of these reports, even though they are critical to our oversight, including: reduction of transportation infrastructure and overhead, improvements in travel administration and processing, and plans to outsource certain payroll, accounting and finance functions. What is the status of these reports? When can the committee expect to receive these reports to ensure proper oversight of these issues?
Doctor GOODMAN. As indicated in the attached transmittal letter, the Defense Transportation Reengineering Report was forwarded to the Congress on December 16, 1996 by the Deputy Under Secretary of Defense (Logistics). The report on payroll, finance and accounting functions of the Department is undergoing final review and will be provided upon completion of that review. Section 356 of the FY1996 National Defense Authorization Act directed DoD to conduct tests to evaluate options to improve the DoD travel process, and submit a report on the implementation of the program. The tests are now complete and data from the various pilot sites are being collected and analyzed, which is expected to take several weeks to complete. The final report to the Congress is planned for the end of June 1997.
OMB Circular A–76 Savings
Mr. BATEMAN. Mr. Goodman. During a hearing before the House National Security Committee on February 26, Deputy Secretary White cited a Center for Naval Analysis study that found competitions conducted under the OMB circular A–76 process saved about $1.5 billion from 1978 through 1994. Can you put a number to the savings expected over the next five years specifically from A–76 public/private competitions? Identify what specific functions will be completed?
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Doctor GOODMAN. By the year 2003, the Department plans on saving about $2 billion annually through the outsourcing and privatization efforts. These funds will become available to meet its Services modernization priorities. The Services and Agencies are evaluating which functions will be studied next. The types of functions which already have been announced include supply, public works, data automation, billeting operations, transportation and occupational health.
Mr. BATEMAN. GAO ''High Risk Series'' raises a concern about DoD computer systems handling the YR2000 issue.
a. What is the department doing to address the year 2000 computer issue?
b. How long does the Department project it will take to update all affected computer systems for the year 2000 issue?
c. How many defense system would generate a security problem if the year 2000 issue is not addressed?
d. How many weapons systems will be affected by the year 2000 issue?
Doctor GOODMAN. The Department of Defense is aggressively attacking the year 2000 computer issue within the framework of a five phase management approach. It is based on Awareness, Assessment, Renovation, Validation, and Implementation. This approach was first identified by the Air Force, adopted for use across DoD, and subsequently adopted by the Federal CIO's Interagency Year 2000 Subcommittee for use across the Federal Government. This is the same framework published in GAO's February 1997 exposure draft, ''Year 2000 Computing Crisis: An Assessment Guide.''
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DoD's progress has been significant in raising awareness of the Year 2000 problem and Year 2000 impact assessments will be completed in June 1997. The Department's Year 2000 Management Plan, which provides policy and guidance, performance measures, roles and responsibilities, and reporting requirements to the Department's Components, is currently being staffed. Contingency plans are required for all mission critical systems impacted by the problem. In addition, a Year 2000 Steering Committee, chaired by the Deputy Secretary of Defense, was established as a decisionmaking body to ensure decisions affecting Year 2000 issues are timely, that critical systems are made Year 2000 compliant and resources are made available for Year 2000 resolutions.
Fixes to Year 2000 impacted systems occur during the Renovation phase of the five phase framework. The target date for completing these fixes is December 1998. This allows one year for validation and implementation of renovated systems. Each of the components is required to assess their systems and prioritize them according to mission criticality. Systems that affect the security, health, and safety of U.S. citizens receive highest priority. The military departments and defense agencies have also been instructed to accelerate migration plans and retire non-compliant legacy systems where possible.
Based on the assessments that have been completed to date, the Department has compiled a list of 113 major defense systems as shown on the attached list. This list contains the major systems that the Department has identified as being critical to the Department performing its mission. The Department is doing a series of assessments that may change the number of major defense systems shown on the attached list.
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Based on the assessments that have been completed to date, we have identified 35 weapons systems with year 2000 impacts. Of these, 24 are Army systems, 4 are Navy systems, and 7 are Air Force systems, as shown in the attached list.
"The Official Committee record contains additional material here."
Outsourcing Savings
Mr. BATEMAN. Mr. Goodman. The services are required to track actual savings from contracts for the first three years only and very few post-contract audits have been performed. Some installations and headquarters officials told GAO they did not know whether current contracts were saving cost as initially projected. What is DoD doing to improve the measurement of outsourcing savings?
Doctor GOODMAN. Savings associated with a cost comparison are entered into the Commercial Activities Management Information System (CAMIS) for the first three years. A key provision of the OMB Circular A–76 Revised Supplemental Handbook is that the government can bid on work which has already been contracted. If the installation commander thinks the cost of the contract is too high, he/she can ensure competition through a new solicitation in which the government would be a bidder.
Base Operating Support
Mr. BATEMAN. Mr. Goodman. Describe what trends exist in obligating funds for base operations over the past several years, particularly maintenance and repair of facilities. How will your budget request for fiscal years 1998 and 1999 affect that trend? Given this trend, how might it affect the availability of funding to pay for outsourcing contracts?
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Doctor GOODMAN. The historical and projected obligation rates, FY95–FY99, for Base Operating Support (BOS) and Real Property Maintenance (RPM) are listed below.
The Department does not feel these trends will affect the availability of outsourcing funding.
Information Technology Management Reform Act
Mr. BATEMAN. Mr. Goodman, has DoD targeted certain activities for privatization pursuant to the Information Technology Management Reform Act (ITMRA)? What are the activities that have been identified?
Doctor GOODMAN. The Department has not targeted specific activities for privatization. The Services and Defense Agencies have developed their own individual competition, outsourcing and privatization plans. Additionally, the ASD(C3I) is examining the implication of ITMRA on their outsourcing plans.
National Imagery and Mapping Agency
Mr. BATEMAN. Mr. Goodman, is DoD pursuing activities to increase the contracting-out of mapping services in the National Imagery and Mapping Agency (NIMA)? Is DoD using a qualification-based selection process in making such determinations?
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Doctor GOODMAN. The Department has not directed NIMA to increase contracting-out of its mapping services. However, all Defense Agencies have been directed to examine their operations for implementation of appropriate efficiencies including outsourcing.
Mr. BATEMAN. In April 1996 the Vision 21 Report on DoD laboratories and test and evaluation centers identified a 29% reduction in workforce was needed by 2001. One criticism of this over capacity has been the DOD labs competing against private firms for commercial contracts in order to fill their capacity.
(a) What has DoD done to follow-through on the Vision 21 Report' recommendations?
(b) Does DoD plan to include the private sector in the development of plans to restructure DoD laboratories?
(c) Has DoD developed an interim solution to minimizing competition for contracts?
(d) What is the Department's position on taking in commercial, non-government work?
Doctor GOODMAN. (a) In our Vision 21 Report we said: ''A 29% reduction in the RDT&E workforce from FY 1992 to FY 2001 is contained in the FY 1997 President's Budget. This has moved and will continue to move the DoD laboratories and T&E centers toward more efficient operations.'' In other words, the reductions are already programmed and are being executed in the Five-Year Defense Plan; these are not recommendations.
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(b) It is not the intention of the Department to include the private sector in the development of Vision 21 restructuring plans. However, in 1994 the Department conducted an extensive laboratory infrastructure capabilities study in cooperation with industry. This information provided inputs to the BRAC '95 process and also provides background information for Vision 21.
(c) It is not the policy of the Department of Defense to directly compete with the private sector. In this regard the Department is issuing interim guidance to responsible individuals charged with implementation of 10 USC §2539b, instructing that diligence be taken in making determinations that providing the services of government laboratories or other facilities will not constitute undue competition with the private sector.
(d) In accordance with 10 USC §2539b, the services of DoD's labs and testing facilities are available for commercial, non-governmental work when it has been established that the provisions of the services will not constitute undue competition with the private sector and the service does not involve the expansion of the capabilities and capacity of the lab or facility providing the service. Of course, the commercial availability of the labs and testing facilities must not interfere with government mission requirements.
CORM Implementation
Mr. BATEMAN. Mr. Goodman, what has DoD done to implement the recommendations in the 1995 Committee on Roles and Missions Report?
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Doctor GOODMAN. Dr. John White, the Department Deputy Secretary, was the Chairman of the Commission on Roles and Missions (CORM). He began an Integrated Policy in August 1995, specifically to implement the CORM recommendations. The highlights of DoD's competition initiative include direction to the Services to make outsourcing and privatization a priority; to reflect their plans in their Program Objective Memorandums; a guarantee that outsourcing and privatization savings will remain with the Services for their modernization priorities; and, establishment of seven functional working groups within the Integrated Policy Team to monitor the Service and Defense Agency competition, outsourcing and privatization progress.
OMB Circular A–76 Studies
Mr. BATEMAN. Mr. Goodman, how many A–76 studies did DoD perform in FY1996? Was this an increase over previous years efforts? How many studies are planned for FY1997 and FY1998 across the Services.
Doctor GOODMAN. The Services and Agencies completed studies on 2,177 full-time equivalent positions (FTEs) in FY 1996, which is more than a thousand above what was studied in FY 1995. The Services are currently formalizing their 1997 FTE plans. We anticipate a major portion of the over 34,000 FTEs announced from October 1, 1995, to January 15, 1997, will be completed in FY 1998.
Mr. BATEMAN. The travel re-engineering program underway in DoD leaves the impression that it leaves out opportunities for small travel agents.
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a. Is it true that DoD will no longer deal with small travel agents?
b. How will the private sector integrate into the new re-engineered process?
Doctor GOODMAN. DoD's commitment to ensuring small business participation in procuring travel services will not change with the acquisition of the new reengineered travel system. To ensure small business, small disadvantaged business, and women-owned business are afforded an opportunity to participate in the travel service acquisitions, large business will be required to submit—as a part of their proposal—a subcontracting plan which includes significant subcontracting goals. The subcontracting plan will be included as an evaluation factor for award. Additionally, small business set-asides will be utilized for follow-on travel services contracts, and we will continue to require large business to submit subcontracting plans.
The initial Defense Travel Service vendor will be required to obtain, integrate, and deploy world-wide the necessary commercial off-the shelf (COTS) products in support of DoD's travel requirements. This deployment includes making access to the common user interface (the software and hardware necessary for the integration of the travel services) available to travel agencies that win contracts to provide travel management services.
Public Depot Requirements
Mr. BATEMAN. Mr. Goodman. This committee has long supported the use of competition to drive down costs. However, we are concerned with reported attempts to restrict public entities thereby minimizing their potential for competing. For example, private companies can choose the method of depreciation they use, while public depots are required to depreciate equipment over the life of the contract. The use of marginal costing which allows public entitled to bid the marginal costs of doing a particular workload is one option under review. What is DoD's view of this option?
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Doctor GOODMAN. The Department is implementing the law concerning existing public depot requirements contained in Title 10 U.S. Code, Section 2462, that ''all costs considered be realistic and fair.''
Elimination of Excess Capacity
Mr. BATEMAN. Mr. Goodman, there appears to be an inconsistency in DoD's position regarding consolidation to improve capacity utilization, reduce costs, and eliminate excess capacity. DoD has implemented a program to allow defense contractors to recover restructuring costs resulting from mergers or acquisition, with projected savings of 1.5 to 7 times the projected costs. However, rather than consolidating depot maintenance workloads among remaining public and private activities, DoD is embarking on costly privatization-in-place efforts at Louisville, Kentucky, Newark, Ohio, Sacramento, California, and San Antonio, Texas. Why is elimination of excess capacity and reduced costs a worthy DoD investment for the defense industry, but not for DoD's own infrastructure?
Doctor GOODMAN. The Department favors reduced costs and the elimination of excess capacity. The Base Realignment and closure process was designed to eliminate excess capacity, and enable DoD to reduce its infrastructure costs. Closing and transferring ownership of no longer needed facilities to local communities permits them to make the best business-based decisions for the assets provided. The Air Force will be competing some workloads in public-private competitions. The outcome of these competitions, which may include performance by a private firm at a closed installation, should result in best value for the government. Competitions for some of DoD's depot maintenance workload, combined with attracting unrelated business in order to fully utilize the capacity of a facility, can be a good strategy for local redevelopment.
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Public-Private Competition
Mr. BATEMAN. Mr. Goodman, DoD spends roughly $131 billion each year on acquisition of weapons systems and spare parts. In these programs, there have been cost overruns, schedule delays, and scandals have been revealed. In light of these problems, why does DoD believe that work should be transferred to the private sector, without public sector competition? Does DoD have any findings that support these transfers of work will save money?
Doctor GOODMAN. The Department favors public-private competition. Competition drives efficiency and performance improvement. Studies commissioned by the Department and positively reviewed by the GAO support competition savings.
Larger Competitions, Larger Savings
Mr. BATEMAN. Historical data shows the smaller the number of positions contracted out, the smaller the savings, i.e., Air Force data shows that functions with less than 25 workers generally show initial savings of only 13%. Conversely, functions with over 300 positions averaged 41 percent in initial savings. For the Commercial Activities studies you've recently announced to the Congress, what is the median number of positions (military and civilian) associated with each candidate study?
General HOUSE. The median number of positions associated with the Commercial Activities studies that the Army announced to the Congress in November 1996 and January 97 is 143 civilian and one military. The average number of positions is 189 civilian and five military.
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Mr. BATEMAN. Are the services emphasizing studies of larger functions or grouping of functions in order to realize larger savings?
General HOUSE. Yes. The Commercial Activities studies that Army field commands recently initiated are generally much larger than those conducted in the past. The reasons most often cited by field personnel are (1) larger studies will be quicker to do on a per-position basis and (2) economies of scale in larger competitions are likely to result in larger percentage savings.
Mr. BATEMAN. How many A–76 studies have involved omnibus, multiple function, or complete base contract for base support? And which bases have been involved?
General HOUSE. The only A–76 study of a complete base was at Fort Irwin, California. A–76 studies of activities that perform more than one function have been conducted at virtually every major army installation in the United States.
Mr. BATEMAN. The GAO report indicates that maintaining military rotational positions creates a problem with outsourcing base operations. How real is this problem?
General HOUSE. The decrease in overseas military personnel during the 1990s has significantly decreased this problem for the Army. None of our field commands surfaced this as a problem during the process of developing their A–76 pre-study congressional announcements.
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OMB Circular A–76 Procedures
Mr. BATEMAN. Since its inception, the OMB Circular A–76 process has been criticized as being complicated and time-consuming for federal agencies to implement. In response to this criticism, OMB recently revised the procedures for conducting public/private competitions under A–76. How does the Department view the recent changes to OMB's guidelines for conducting public/private competitions?
General HOUSE. The changes in the March 1996 OMB Circular A–76 Revised Supplemental Handbook should accelerate and simplify the study process.
Mr. BATEMAN. Will the changes make it easier and less time-consuming for the Department to conduct these competitions?
General HOUSE. Yes. One example is the elimination of procedures for requesting exceptions to certain costing factors, such as for overhead and contract administration costs. This will eliminate the lengthy process of obtaining approval from Army headquarters for exceptions to these cost factors. Another example of a provision that would be helpful is the new Streamlined Cost Comparison procedure; however, DoD is currently unable to take full advantage of this procedure because of the recurring provision in the DoD Appropriations Act—Section 8015 of the FY 1997 Act—that requires us to develop a ''most efficient organization analysis'' before outsourcing a function performed by more than 10 employees. In order to ensure a level playing field, the Streamlined Cost Comparison procedure requires that the cost of existing comparable contracts at other installations be compared to the cost of the current activity—not to the cost of a streamlined ''most efficient organization''—before soliciting for contract offers.
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Mr. BATEMAN. Does the Department have any recommendations for additional changes to the A–76 process or its implementation?
General HOUSE. The study process in OMB Circular A–76 provides a system to evaluate both private sector and public costs with a ''level playing field.'' With this ''level playing field,'' we can determine who will provide the best value for the Defense dollar. In addition, the process allows the government workforce to focus on efficiencies which the current bureaucracy has been a hindrance to implementing. Overall, we would change very little since it provides a process for determining how to obtain recurring services and products at the ''best value.'' What we would recommend—not part of OMB Circular A–76—is the elimination of the requirement to provide notifications to Congress under 10 USC 2461 and section 8015 of the Defense Appropriations Act for Fiscal Year 1997. These notifications take time and delay the transition to the ''best value'' provider.
Elimination or Waiver of OMB Circular A–76
Mr. BATEMAN. What impact would elimination or a waiver of the A–76 requirements have on the Department's outsourcing opportunities.
General HOUSE. There would be no impact if the recurring provision in the DoD Appropriations Act—Section 8015 of the FY 1997 Act—continues to be enacted. This provision in practice requires DoD activities to use the A–76 study process as the process for determining whether outsourcing is the cost-effective option.
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Number of A–76 Experts
Mr. BATEMAN. The GAO indicated that the number of A–76 experts in the Department dropped considerably at the end of the 1980s. What is DoD and the Services doing to fill this gap in knowledge?
General HOUSE. The Army has arranged to have the A–76 studies performed by contract if field commands so choose. Over 90% of the A–76 studies that the Army announced to Congress in November 1996 and January 1997 will be performed by contract. We are doing this by issuing delivery orders against existing contracts between the Office of the Assistant Secretary of the Army (Financial Management and Comptroller) and contractors who have experience performing A–76 studies.
Mr. BATEMAN. Has DoD or the services reviewed the opportunity to consolidate A–76 personnel across the Services and Defense agencies?
General HOUSE. The Army has not pursued consolidation of the few A–76 experts in the Army. We believe that having the A–76 studies performed by contractors, as we are currently doing, is a better solution.
Savings From Outsourcing and Privatization
Mr. BATEMAN. The Department has predicated its fiscal year 1998–2002 spending plans on savings generated through outsourcing and privatization of support functions. Yet, in large part, specific initiatives for outsourcing and privatization are dependent on the results of studies that are currently ongoing. What does the service project it will save from outsourcing and privatization for each of the fiscal years 1998–2003 and, what, specifically, are the basis for the savings projections?
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General HOUSE. The Army did not project savings in fiscal years 1998–2003. The Army has only initiated studies of approximately 10,000 positions.
Mr. BATEMAN. What specific functions will be competed?
General HOUSE. The Army plans to compete all non-medical commercial activities at all Army installations by fiscal year 2003, except where prohibited by law. (We will not compete those commercial activities—such as firefighter and security guard services—that are protected from competition by law.) There are approximately 50,000 positions performing these activities.
Mr. BATEMAN. How much risk is the Department assuming by basing its spending plans on savings that are only expected to be realized and not actual?
General HOUSE. We have not taken these savings out of any programs in our budget, nor have we predicated success of any of our programs on use of these savings. Our primary risk thus resides in our use of funds to pay for the cost comparison studies—about $10 million per year—the risk being that these up-front costs will not be recouped through savings. However, we are confident that these cost comparisons will yield substantially more savings than they cost.
Mr. BATEMAN. Does the Department have a contingency plan if these anticipated savings do not materialize?
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General HOUSE. The Army has not anticipated savings from outsourcing and privatization in its FYDP.
Mr. BATEMAN. How does the estimated savings in the FY98 budget address the outsourcing impediments indicated in the recent GAO study on Base Operations indicates?
General HOUSE. The Army did not project savings in fiscal years 1998–2003.
Military Performing Support Functions
Mr. BATEMAN. GAO contends that conversion of military functions to civilian or contractor provides the potential for greater savings because military personnel cost more. In addition, conversions involve shifting funding from the military personnel account to the operations and maintenance account, which can take up to 2 years. How many military personnel are currently performing commercial-type functions and why are military used to perform commercial functions?
General HOUSE. The Army has approximately 25,000 military personnel performing commercial-type functions. Most of these personnel perform medical functions. The main reason the Army uses military personnel to perform non-medical commercial-type functions is where the military personnel have critical skills that are hard to find in civilian employees.
Mr. BATEMAN. What specific initiatives have the services undertaken to overcome the barriers to outsourcing military personnel in support-type functions?
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General HOUSE. We have not undertaken such an initiative recently. We foresee no significant barriers to outsourcing Army military personnel in support-type functions.
Mr. BATEMAN. Does the services' annual savings projections from outsourcing and privatization take into consideration shift in funding?
General HOUSE. The Army did not project savings in fiscal years 1998–2003.
Congressional Notification Requirements
Mr. BATEMAN. Section 2461 of Title 10 requires notification to Congress of all A–76 studies. Is there any reason why this notification does not include the costs of the proposed study(ies) and the estimated time to completion the study(ies).
General HOUSE. When the Army notifies Congress of its intent to conduct an A–76 study as required by 10 USC 2461, our practice is to include in the notification the fiscal year during which we plan for the study to be completed. Regarding inclusion of proposed study cost, we would hope that such a requirement would not be imposed. Study cost is much more difficult to predict than completion time. Including study cost would complicate the already time-consuming process of making the congressional pre-study notification.
Competing Guards and Firefighters
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Mr. BATEMAN. If the legal prohibition on outsourcing DOD guards and firefighters was lifted, how many guards and firefighters could potentially be outsourced? Is this essentially the same as the number of guards and firefighters in non-warfighting support positions?
General HOUSE. If 10 USC 2465 were repealed, the Army would be able to compete 1592 civilian and 273 military guard positions and 2087 civilian and 173 military firefighter positions—a total of over 4000 positions. Yes, this is essentially the same as the number of guards and firefighters in non-warfighting support positions.
Army's Announced A–76 Studies
Mr. BATEMAN. General House, the Army recently announced the funding of several A–76 studies affecting 10,000 positions. Of these, 90% are civilians in installation support activities. Are the savings for these studies assumed in the FY 1998 budget?
General HOUSE. No. The Army has not re-programmed projected savings from outsourcing and privatization initiatives.
Mr. BATEMAN. In what year are savings estimated to begin?
General HOUSE. We expect savings to start in fiscal year 1999, although its is possible we may realize a small amount of savings from some of these studies towards the latter part of fiscal year 1998.
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Mr. BATEMAN. How does the Army intend on reviewing outsourcing for the 10% of services held by military personnel?
General HOUSE. About 3% of the positions that the Army is studying are military. We do not do these studies position by position, but rather activity by activity. For example, we will study an installation's logistics directorate for cost comparison and possible outsourcing. If that activity includes military positions, they will be studied right along with the civilian positions. As part of the cost comparison, the development of a ''most efficient organization'' (MEO) will not continue to include military positions.
Mr. BATEMAN. How long until the Army bids these services for contract?
General HOUSE. We anticipate that the contract solicitations for most of these services should be issued some time in fiscal year 1998.
Civilian Downsizing
Mr. BATEMAN. General House, what impact does civilian downsizing have on the decision to outsource activities in contrast to privatization.
General HOUSE. We have consistently stressed that the purpose of our outsourcing and privatization initiatives is to achieve efficiencies to enable the Army to effectively accomplish its mission despite funding reductions and increased funding requirements. Thus, we are asking the Army's field commands to search aggressively for opportunities to use competition and better business practices in their efforts to achieve efficiency. Smaller may be more efficient—but the purpose is to become more efficient, not to reduce the number of in-house civilian employees.
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Mr. BATEMAN. For all witnesses, historical data shows the smaller the number of positions contracted out, the smaller the savings, i.e., Air Force data shows that functions with less than 25 workers generally show initial savings of only 13%. Conversely, functions with over 300 positions averaged 41 percent in initial savings.
For the Commercial Activities studies you've recently announced to the Congress, what is the median number of positions (military and civilian) associated with each candidate study?
Are the services emphasizing studies of larger functions or grouping of functions in order to realize larger savings?
How many A–76 studies have involved OMNIBUS, multiple function, or complete base contract for base support? and which bases have been involved?
The GAO report indicates that maintaining military rotational positions creates a problem with outsourcing base operations. How real is this problem?
Rear Admiral SCUDI. The average number of positions (military and civilian) associated with each candidate study in the Navy's most recent announcement is 84. More significantly, over 80% of the positions announced are in studies of over 100.
The Navy is emphasizing studies of larger functions or groupings of functions as a matter of policy. For example, we are conducting Navy wide studies of certain functional areas such as pest management and motor vehicle maintenance. Additionally, we are grouping some studies by region such as in the Pensacola area and in Guam. Others are bundled into overall base operations support packages such as at the Naval Air Station Joint Reserve Base, Willow Grove, PA and at the Naval Education and Training Center, Newport, RI.
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The bundling of functions into an overall base operations support package has generally proven to yield more efficiencies than multiple competitions involving separate functions.
Aside from the lesser effort involved in a single solicitation, multifunction comparisons yield greater opportunities for economies of scale. Several examples of where we have used this approach successfully in the past are the Naval Submarine Bases at Kings Bay, GA and Bangor, WA and the Naval Air Stations at Jacksonville, FL and Fallon, NV.
Each proposed outsourcing initiative involving military billets is coordinated with our Manpower Programmers to identify its potential impact on sea-shore rotation requirements. Potential adverse impact can be minimized by consolidating billets of like critical skill types at selected sites for exemption from privatization, thereby leaving a similar function available at other sites for outsourcing. The bottom line is that we must monitor and coordinate our outsourcing initiatives carefully to minimize adverse impact on sea-shore rotation, but we can do that. Thus while it is a real problem, it is a manageable one that we are successfully addressing. We must achieve the maximum savings possible through outsourcing to the extent possible while protecting our sea-shore rotation base.
Mr. BATEMAN. For all witnesses, since its inception, the OMB Circular A–76 process has been criticized as being complicated and time-consuming for federal agencies to implement. In response to this criticism, OMB recently revised the procedures for conducting public/private competitions under A–76.
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How does the Department view the recent changes to OMB's guidelines for conducting public/private competitions?
Will the changes make it easier and less time-consuming for the Department to conduct these competitions?
Does the Department have any recommendations for additional changes to the A–76 process or its implementation?
Rear Admiral SCUDI. The Navy finds the recent overall changes to OMB's guidelines for conducting public/private competitions found in the Revised Supplement to OMB Circular A–76 very helpful and we are incorporating them into our Navy Instruction.
By streamlining the process and clarifying procedures the Revised Supplement will make it easier for us to conduct these competitions.
We believe the Circular's threshold of 10 civilian employees to generate an A–76 cost comparison is too low and recommend raising it to 50 civilian employees. Other than this, we have no other significant recommendations for changes to the A–76 process or its implementation at this time.
The Navy does, however, have a few recommendations for Congressional relief from legislative constraints. Two examples immediately come to mind—the prohibitions against contracting in 10 USC 2465 (the prohibition against contracting for firefighters and guards) and in 10 USC 2466 (the 60/40 rule for depot maintenance). In both of these instances, we are prevented from realizing the economies and benefits associated with conducting outsourcing competitions with the commercial sector by statutory prohibitions. Other statutes burden the outsourcing decision-making process with reporting requirements that are, quite frankly, excessive. Language in Section 8015 of the Fiscal Year 1997 Defense Appropriations Act, for example, requires certifications to Congress to outsource as few as 11 civilian employees. We want to make smart business decisions, but no business with an annual budget of billions of dollars would encumber this kind of small make-buy decision with the kind of executive scrutiny and review required by this statute. We need relief from these kinds of impediments to do what makes sense.
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Mr. BATEMAN. For all witnesses, what impact would elimination or a waiver of the A–76 requirements have on the Department's outsourcing opportunities?
Rear Admiral SCUDI. A–76 requirements dictate a specific process with detailed time and labor intensive steps, such as its independent review and appeals process. Eliminating or waiving A–76 would result in some economies including faster completion of the analysis and the decision making process. However, we realize we must maintain a structured process to guarantee a thorough, fair and impartial data evaluation. This allows our Commanding Officers, who will be in charge of the competitions, to give their employees and unions every opportunity to participate in the process and to keep them fully informed of the progress as it occurs. We want to conduct fair and open competitions, and we want to minimize as much as we can any disruption to our dedicated workforce.
Mr. BATEMAN. For all witnesses, the GAO indicated that the number of A–76 experts in the Department dropped considerably at the end of the 1980s.
What is DoD and the Services doing to fill this gap in knowledge?
Has DoD or the services reviewed the opportunity to consolidate A–76 personnel across the Services and Defense agencies?
Rear Admiral SCUDI. The Navy has formed a new Outsourcing and Privatization Programs Division in the Office of the Deputy Chief of Naval Operations (Logistics) to address competition and outsourcing issues. In addition we have set up an Outsourcing Support Office (OSO) at the Systems Command level. This office is staffed by acquisition and functional experts from several Commands all over the country and is available to base commanders on an as needed basis to answer questions and help onsite in various capacities. We have also developed a Base Commander's Outsourcing Handbook which will facilitate the competition study process. This handbook provides examples, templates and lessons learned from a variety of sources significantly reducing study time and effort required. An Outsourcing Homepage was also established to keep our claimants up to date on the latest outsourcing guidance and information.
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We currently plan on investing approximately $165M to execute our outsourcing strategy. While this is a significant investment, we anticipate that it should result in annual savings exceeding $1B per year by the end of the FYDP. The bulk of this funding will be used to procure contractual support to assist our field activities in developing the performance work statements and management plans and in conducting the cost comparisons that constitute the outsourcing competition process.
Given differences in missions, organizations and programs, consolidating A–76 across DoD would not prove beneficial. Furthermore, the economies of scale of such a consolidation effort would pass the point of diminishing returns. The Services' and OSD staffs, however, are in constant contact and coordinate closely to take advantage of lessons learned. All Services, for example, will use the COMPARE cost comparison software developed by the Air Force to expedite the study process.
Mr. BATEMAN. For all Services, the Department has predicted its fiscal year 1998–2002 spending plans on savings generated through outsourcing and privatization of support functions. Yet, in large part, specific initiatives for outsourcing and privatization are dependent on the results of studies that are currently ongoing.
What does the service project it will save from outsourcing and privatization for each of the fiscal years 1998–2003 and, what, specifically, are the basis for the savings projections?
What specific functions will be competed?
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How much risk is the Department assuming by basing the spending plans on savings that are only expected to be realized and not actual?
Does the Department have a contingency plan if these anticipated savings do not materialize?
How does the estimated savings in the FY98 budget address the outsourcing impediments indicated in the recent GAO study on Base Operations?
Rear Admiral SCUDI. Our fiscal year 1998 budget request does not include any projected savings from outsourcing competitions. Our FYDP assumes approximately $3B in savings from outsourcing competitions from FY 2000–FY 2003 as follows: FY 2000–$207M; FY 2001–$557M; FY 2002–$963M; FY2003–$1386M. No savings are reflected in FYs 1998 and 1999 to account for the lead time associated with conducting outsourcing competitions.
We have recently announced 8,500 civilian positions and 2,200 military billets as candidates for outsourcing competition. This announcement is the first in a number of announcements that Navy intends to make across the FYDP which will involve, in total, about 50,000 civilian positions and 30,000 military billets. These competitions are expected to achieve savings of $3.1B over the FYDP with an annual steady state savings of $1.3B. These competitions will be spread across a broad spectrum of support functions—base support, intermediate-level maintenance, real-property maintenance, construction, training and R&D services.
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There is a negative wedge of approximately $3B in the current FYDP. While our target is indeed ambitious, we believe it is achievable, given the intense levels of management attention and oversight this program will continue to receive. We recognize that if we do not achieve these savings that we will be unable to modernize at the levels currently projected in the FYDP. Given the criticality of modernizing, we will be closely monitoring our program execution to ensure we do meet our $3B savings goal. We believe that the measures we are taking will keep the level of risk associated with our plan at a reasonable level, e.g. the establishment of N47 and the Outsourcing Support Office, the development of a program handbook and the investment that will be used to provide consultant support to our field activities.
In addition to outsourcing competitions, we are looking across a broad array of initiatives as a contingency measure to ensure we meet our savings goal if savings from outsourcing competitions do not materialize.
DON expects competition to figure prominently in efforts to achieve efficiencies through reengineering of its infrastructure. The savings resulting from competition and other streamlining initiatives, e.g., privatization, dual use, regionalization, and Smart Base will provide regional commanders a broad range of options for reengineering infrastructure and result in a dividend that can be applied to recapitalize and modernize the fleet. Currently, a team is actively looking for innovative ways to save money through privatization and dual use. The Smart Base Study will evaluate opportunities to improve shore installation mission readiness and management through intelligent application of state-of-the-market technology and new business practices, e.g., commercial-off-the-shelf software. Regionalization studies are currently underway that will delete redundant functions and allow for more streamlined work requirements.
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Our fiscal year 1998 budget request does not include any projected savings from outsourcing competitions.
Mr. BATEMAN. For all Services, GAO contends that conversion of military functions to civilian or contractor provides the potential for greater savings because military personnel cost more. In addition, conversions involve shifting funding from the military personnel account to the operations and maintenance account, which can take up to 2 years.
How many military personnel are currently performing commercial-type support functions and why are military used to perform commercial functions?
What specific initiatives have the services undertaken to overcome the barriers to outsourcing military personnel in support-type functions?
Does the services' annual savings projections from outsourcing and privatization take into consideration shifts in funding?
Rear Admiral SCUDI. Our latest Commercial Activity Inventory from August of 1996 lists over 73,000 military personnel in commercial activity functions. They are performing these functions for a variety of reasons, including military related considerations such as career progression and sea shore rotation.
The Navy is currently reviewing commercial activities performed by MILPERS to determine those tasks that are no longer necessary for sea shore rotation, career progression or other special consideration. We do not intend to compete those positions needed for militarily essential regions. We are also working on integrating the conversion of MP to O&M into the programming process. These two initiatives should enable us to compete all available positions in support functions now staffed by military personnel.
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In our current announcement we have identified 2,200 military billets as candidates for outsourcing competition. This announcement is the first in a number of announcements that Navy intends to make across the FYDP which will involve, in total, about 50,000 civilian positions and 30,000 military billets, which is nearly one half of the total military now performing these functions.
Again, no savings are reflected in FYs 1998 and 1999 to account for the lead time associated with conducting outsourcing competitions. Our FYDP, however, does assume approximately $3B in O&M savings from outsourcing competitions from FY2000–FY2003, which takes into consideration the shift in funding of affected military positions from the military personnel account to the operations and maintenance account.
Mr. BATEMAN. For all Services, Section 2461 of Title 10 requires notification to Congress of all A–76 studies. Is there any reason why this notification does not include the costs of the proposed study(ies) and the estimated time to completion of the study(ies)?
Rear Admiral SCUDI. When Congress is notified of A–76 studies, they are identified by function and location. Variations in functions, geography and size would make estimating costs difficult. Presently, we also lack any valid data upon which to base such estimates. With the development of study guides and tools by our Outsourcing Support Office we are hoping to improve on the time thresholds mandated by the Defense Appropriations Act, but again, we lack the data to determine exact schedules at this time. Based on these factors, this type of notification would be premature and of dubious value.
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Mr. BATEMAN. For all Services, if the legal prohibition on outsourcing DOD guards and firefighters was lifted, how many guards and firefighters could potentially be outsourced? Is this essentially the same as the number of guards and firefighters in non-warfighting support positions?
Rear Admiral SCUDI. Based on our latest inventory, there are over 5800 personnel performing guard and fire services at our bases. They are evenly divided between the two functions with nearly two thirds being civilian.
While all are in non-warfighting support positions, some of the military positions are used for sea shore rotation. Without a more detailed review, we cannot provide an accurate estimate of exactly how many military positions could become outsourcing candidates. All of the civilian positions, however, would be open to competitive sourcing.
Mr. BATEMAN. Admiral Scudi, the Navy's FY98 budget submission identifies over $30 million in O&M costs between FY98 and FY01 associated with privatization and outsourcing.
What activities are generating these costs?
What are the activities that generate the largest estimated savings between FY00 and FY04?
Rear Admiral SCUDI. A recent CNA study estimated that the Navy spends over $10B annually performing in-house functions or activities that could be easily purchased from the private sector. Setting aside activities covered by special situations (e.g., legislative restrictions such as 60/40 rule for depot maintenance and the prohibition on contracting for fire fighting and guard functions) still leaves more than $4B of Navy commercial activities employing almost 80,000 people. Our investment cost was developed by using an estimate of $2K per position studied not by referring to specific CAs identified by CNA. CNA identified four functional categories (training, base support, health services, and maintenance) as the ones with the most potential for achieving savings. By subjecting these billets to competition as we plan to do and if that competition yields the 30% average savings achieved in the past, we can achieve almost $1.3B annual savings by FY 2003 for recapitalization of DON weapon systems.
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Mr. BATEMAN. Admiral Scudi, the Navy is engaged in streamlining shore infrastructure through regionalization/consolidation.
How are privatization and outsourcing integrated into these regionalization/consolidation efforts?
What activities are outsourced under the implemented regionalization/consolidation at Jacksonville and San Diego?
Rear Admiral SCUDI. I am currently the Division Director of both divisions involved with these initiatives. Both staffs are in regular communication and working toward the same goal to achieve efficiencies through reengineering of our infrastructure. Our competition study announcement specifically avoided functions and locations that were included in other efforts. Competition and other streamlining initiatives, e.g., privatization, dual use, regionalization and Smart Base working in tandem will provide regional commanders with a broad range of options for savings and result in a dividend that can be applied to recapitalize and modernize the fleet. Currently, a team is actively looking for innovative ways to save money through privatization and dual use. The Smart Base Study will evaluate opportunities to improve shore installation mission readiness and management through intelligent application of state-of-the-market technology and business practices.
The Navy is working diligently to ensure that we outsource and privatize in a manner that focuses on regional requirements. As we complete our regionalization analyses in each fleet concentration area, we will evaluate the potential to expand our outsourcing efforts to look at regional competitions of base operating support functions, thereby avoiding conducting single function/single activity outsourcing competitions when ''umbrella,'' regional competitions make more sense.
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In both San Diego and Jacksonville, we have completed the initial analysis of regionalization opportunities, and are only just now beginning to implement regionalized organizational structures. As such, we have not yet outsourced any functions as a follow-on to regionalization in San Diego and Jacksonville. The public works functions in Jacksonville had been substantially ousourced prior to the regionalization study and will remain so. At both locations, we will only outsource functions when it's demonstrably cost effective.
Mr. BATEMAN. Admiral Scudi, Please provide a copy of the Navy's regionalization and outsourcing regional and national plans and milestones.
Rear Admiral SCUDI. This past January, I provided Congressional notification of our intent to compete some 10,700 positions across the country under Circular A–76 standards. In this initial effort, the bulk of the positions are in base support functions such as public works, supply, berthing, and motor vehicle maintenance. There are also significant efforts involving administrative support, data processing, and child care. We are hoping to expedite these initial studies and anticipate completion within 12 to 18 months of the start date. We expect additional notifications to Congress on an annual basis of an average of 15,000 positions for the next four years.
We are also studying the feasibility of privatizing Navy utility systems (electric, natural gas, potable water, wastewater) at Public Works Center Jacksonville, Florida; Construction Battalion Center Port Hueneme, California; Naval Station Pascagoula, Mississippi; and Naval Air Station Whidbey Island, Washington. We have not established a firm time line for this effort at this time.
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As a part of the Navy's Infrastructure Cost Reduction Initiative, the Office of the Chief of Naval Operations is currently working with the Fleets, Major Claimants and our regional commanders (Naval Bases) to analyze the savings which can be realized by consolidating or ''regionalizing'' installation management functions in our fleet concentration areas. The goal of this effort is to reduce base operating support (BOS) costs through the elimination of unnecessary management layers, duplicative overhead and redundant functions. Initial analyses have been completed in San Diego, CA, Pearl Harbor, HI and Jacksonville, FL. Implementation for these areas will be phased in over the next 2–4 years. Similar analyses are currently on-going in Norfolk, VA, Puget Sound, WA, Pensacola, FL and Washington, DC. Over the next 1–2 years, we will also analyze regionalization opportunities in our other Naval concentrations (South Texas, New Orleans, Great Lakes, Northeast US, Guam, Japan, Europe, Port Hueneme/Point Mugu and Mississippi).
Base Communications Squadrons
Mr. BATEMAN. The Air Force is currently undertaking a review of base communications squadrons for outsourcing and privatization. When is the review expected to be completed?
Brigadier General CAMERON. The Air Force is not undertaking a review solely of base communications squadrons. We have developed a new process to better structure our review of functional areas. As a means to test this new concept for its viability to analyze any organizational function's sourcing options, we have chosen communications squadrons at two locations. This test will occur this summer, with a team reporting back to the Air Staff early fall.
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Mr. BATEMAN. How many base communications squadrons are part of the review?
Brigadier General CAMERON. We are testing a new concept to review the process by which we analyze any organizational function's sourcing options. We happen to be doing this review at two communications squadrons. The base communication squadrons are not actually under review except as part of our Jump Start program which is a larger effort to look at all functional areas.
Mr. BATEMAN. Is it expected that all base communication squadrons will be affected by the results of this study? If not, what criteria is used to exclude a base from the findings?
Brigadier General CAMERON. It is too early to tell the outcome of our review. The base communication squadrons are being used to test a process, not to determine the further design or organization of the squadrons. The end result of the test may provide commanders factual information to make sourcing decisions but those decisions will be made on a functional basis not on a squadron basis.
O&P Savings
Mr. BATEMAN. For the Commercial Activities studies you've recently announced to the Congress, what is the median number of positions (military and civilian) associated with each candidate study?
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Brigadier General CAMERON. Of the cost comparisons recently announced to Congress, the average number of positions is 184 (60 military and 124 civilians).
Mr. BATEMAN. Are the services emphasizing studies of larger functions or group of functions in order to realize larger savings?
Brigadier General CAMERON. Yes, we are emphasizing that the larger the study the greater the savings. In fact, 60% of our in-progress studies are multi-function.
Mr. BATEMAN. How many A–76 studies have involved OMNIBUS, multiple function or complete base contract for base support? and which bases have been involved?
Brigadier General CAMERON. Since 1979, we have conducted 14 A–76 multi-functional studies for base operating support. Ten of these remained in-house and four were contracted. The contracted locations include Niagara Falls International Airport, NY; Richards Gebaur, Ms; Indian Springs, Nev. and Eareckson, AK. The in-house locations are Goodfellow AFB, Texas, as well as the following Air Force Reserve Bases: O'Hare International Airport, Ill; Dobbins, Ga; General Mitchell International Airport; Pittsburg International Airport, Pa; Minneapolis-St. Paul International Airport, Minn; Newark Westover, Mass; Willow Grove, Pa; and Youngstown-Warren Regional Airport, Ohio.
Mr. BATEMAN. The GAO report indicates that maintaining military rotational positions creates a problem with outsourcing base operations. How real is this problem?
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Brigadier General CAMERON. It is not a problem in the Air Force. It is our policy that we do not and will not outsource any positions that are required to support our military rotational base.
Mr. BATEMAN. How does the Department view the recent changes to OMB's guidelines for conducting public/private competitions?
Brigadier General CAMERON. We believe the recent changes provide a more level playing field particularly in best value procurements. We are not convinced a 12% overhead factor contributes to the level playing field and are still assessing its impact on Air Force public/private competitions.
Mr. BATEMAN. Will the changes make it easier and less time-consuming for the Department to conduct these competitions?
Brigadier General CAMERON. Not necessarily. This process requires an investment in time and resources to ensure fairness to both sides. We believe familiarization through A–76 education and training will ease the complexity and decrease the time necessary to conduct A–76 studies. Writing a performance work statement and the Federal Acquisition Regulation requirements take the most time in these competitions and these are not impacted by changes made by OMB.
Mr. BATEMAN. Does the Department have any recommendations for additional changes to the A–76 process or its implementation?
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Brigadier General CAMERON. The only changes would be to revalidate the 12% overhead cost factor to ensure it is a correct factor to use in public/private competitions thus ensuring fairness to our Air Force employees.
Mr. BATEMAN. What impact would elimination or a waiver of the A–76 requirements have on the Department outsourcing opportunities?
Brigadier General CAMERON. Elimination or a waiver of the A–76 requirements would decrease our savings potential and prevent our Government employees the opportunity to compete with the private sector. We do not wish to pursue wholesale outsourcing without regard for competition which is not in the interest of the Air Force nor the American taxpayer.
We do not have the preconceived position that functions should be arbitrarily contracted nor do we assume contracting always saves defense dollars as would be the case if A–76 was eliminated or waived. Our history demonstrates it is the competition between in-house and contract that generates savings and is the conscientious position for our employees.
When not required to support readiness and when capability is still necessary, our policy is to compete functions with the private sector using a standardized and competitive process to ensure every defense dollar is wisely spent. A–76 provides this process for competition with the Government. While many may not like it, A–76 does provide standardization for public/private competition across the Federal Government. Participants enter into these competitions understanding the rules of engagement. The results of A–76 competitions provide our commanders with sound, fact-based decisions to outsource or retain functions in-house.
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Forty percent of our competitions determine in-house is more efficient and cost effective than outsourcing. Elimination or a waiver of the A–76 requirements would greatly impact our savings generated by this 40%. Additionally, it would be a disservice to our government employees where competition proves they can be more efficient and cost effective than the private sector.
Mr. BATEMAN. What is DoD and the Services doing to fill this gap in knowledge?
Brigadier General CAMERON. While our A–76 expertise has declined in recent years, Air Force has never eliminated the need to comply with A–76. Therefore, our Manpower personnel will continue to receive A–76 training that has been and continues to be an integral part of a Manpower officer's required duties. Air Force does not have a gap in knowledge; however, we are providing more training to ensure our personnel are well equipped for the increasing number of A–76 studies.
Mr. BATEMAN. Has DoD or the services reviewed the opportunity to consolidate A–76 personnel across the Services and Defense agencies?
Brigadier General CAMERON. No. Each Service has specific requirements and methods unique to their Service to Implement A–76. We share information to assist each other where possible. In fact, the Air Force developed a costing model for A–76 costing methodology that can be used not only within DoD agencies but across the Federal Government. Therefore, we work together but do not support consolidation within DoD.
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Mr. BATEMAN. What does the service project it will save from outsourcing and privatization for each of the fiscal years 1998—2003 and, what, specifically, are the basis for the savings projections?
Brigadier General CAMERON. This is the projected savings, by year, from O&P as reflected in the Air Force budget.
The basis for our savings projection is our historical statistics on savings resulting from competition. All $ are in M.
Mr. BATEMAN. What specific functions will be competed?
Brigadier General CAMERON. Any function that is not military essential (directly supports readiness) or is not inherently governmental, is eligible to be competed.
Mr. BATEMAN. How much risk is the Department assuming by basing in spending plans on savings that are only expected to be realized and not actual?
Brigadier General CAMERON. We are assuming a conservative approach to our projected savings from competition. Historically, we generate over 30% savings per competition but we are using a 20% savings figure to insure we do not overstate our savings.
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Mr. BATEMAN. Does the Department have a contingency plan if these anticipated savings do not materialize?
Brigadier General CAMERON. Since they are based on conservative, historical estimates, we are confident that they will materialize.
Mr. BATEMAN. How does the estimated savings in the FY98 budget address the outsourcing impediments indicated in the recent GAO study on Base Operations indicates?
Brigadier General CAMERON. Aside from the Military floor, we see no impediments to meeting our FY98 budget. However, other impediments including 60/40 and the prohibition on contracting firefighters and security guards will affect future savings.
Mr. BATEMAN. How many military personnel are currently performing commercial-type support functions and why are military used to perform commercial functions?
Brigadier General CAMERON. We currently have 27,239 military performing commercial-type support functions. These military are exempt from cost comparison because they are required to support our wartime mission, provide a critical military skill, or are necessary to ensure we can meet our overseas rotational base. For example, a communications officer performs a commercial-type support function but may be necessary to meet a deployment tasking. The officer's workload is commercial in nature (communications) but is necessary to meet our wartime commitments.
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Mr. BATEMAN. What specific initiatives have the services undertaking to overcome the barirers to outsourcing military personnel in support-type functions?
Brigadier General CAMERON. It has been and continues to be Air Force policy that our military are used for military essential purposes. The fact that military are in support-type functions does not negate that fact that these support-type functions may be necessary to meet our wartime commitment. We conduct an annual Commercial Activity Review requires a scrub of military essentiality. In addition to this Review, we are currently reassessing our wartime baseline to maximize the number of candidates for competition or outsourcing without impacting our mission.
Mr. BATEMAN. Does the services' annual savings projections from outsourcing and privatization take into consideration a shift in funding?
Brigadier General CAMERON. Yes. When we project savings that may come from eliminating military, we must transfer the funding into our operations and maintenance appropriation to ensure funding will be available for the potential contract and the remaining (savings) will be applied to modernization.
Mr. BATEMAN. Section 2461 of Title 10 requires notification to Congress of all A–76 studies. Is there any reason why this notification does not include the costs of the proposed study(ies) and the estimated time to completion the study(ies)?
Brigadier General CAMERON. We could include the estimated time to complete our studies in our notifications. However, this estimated time is typically consistent with P.L. 104–208, Section 8015, that requires single function cost comparisons to be completed within 2 years and multi-function studies to be completed within 4 years. Most of our studies require 18–24 months to meet the requirements necessary for procurement under the Federal Acquisition Regulation.
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Since conducting studies is part of an integral part of our day-to-day operation in the Air Force, it is difficult to capture the actual cost associated with conducting the studies.
Guards and FIREFIGHTERS
Mr. BATEMAN. For All Services, if the legal prohibition on outsourcing DoD guards and firefighters was lifted, how many guards and firefighters could potentially be outsourced? Is this essentially the same as the number of guards and firefighters in non-warfighting support positions?
Brigadier General CAMERON. For guards, although the legislative prohibition is a driver for outsourcing, another consideration is our capability to meet our wartime missions. At this point in time we do not believe we have positions beyond our wartime requirement to consider for outsourcing. For firefighters, as part of the development of our outsourcing plans, we are working to consolidate our military deployable personnel at a reduced number of bases. Once this is complete, the firefighters at bases where there are no military wartime taskings could be cost compared if the legal prohibition was lifted. Because of the long standing prohibition on outsourcing these positions, a coordinated Air Force assessment on the number of positions this would produce has not yet been developed.
O&P SAVINGS
Mr. BATEMAN. Are these savings based on completed A–76 studies?
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Brigadier General CAMERON. No, the savings is projected on the number of positions we expect to compete and applies a conservative savings percentage based on our A–76 historical statistics dating to 1979. Historical savings is 25% but recent A–76 savings indicate a savings of over 30%. In an effort to not over estimate, we used a conservative estimate of 20% to project our savings.
Mr. BATEMAN. What actives will be outsourced under these estimates?
Brigadier General CAMERON. We do not base our estimates on outsourcing but on competition. We based our savings projections on the savings generated by the competition between in-house and contract not the results of the competition, i.e., contract or in-house. We plan compete any activity that is not military essential or inherently governmental. If the competition determines outsourcing is cost effective, then if will be outsourced.
Mr. BATEMAN. What are the estimates savings for each item?
Brigadier General CAMERON. The savings estimates for each study is 20%.
Defense Megacenter Operations
Mr. BATEMAN. [Response from witnesses follows:]
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Brigadier General CAMERON. Communications (to include automatic data processing) is a service that is available from the private sector, therefore, it is classified as a commercial activity. This criteria is set forth in the Office of Management and Budget Circular A–76, Performance of Commercial Activities. Government functions are either commercial (contractable) or inherently governmental (non-contractable).
In some cases commercial activities may be necessary to meet our wartime requirements. For example, personnel performing communications functions that deploy to perform communications related workload in war cannot be contracted as they are military essential. However, personnel performing communications functions that are not military essential can have their workload competed for potential outsourcing in accordance with OMB Circular A–76.
This non-military essential workload is not considered inherently governmental because personnel in communications functions do not perform any workload where they make decisions on behalf of the government.
Mr. BATEMAN. For all witnesses, historical data shows the smaller the number of positions contracted out, the smaller the savings, i.e., Air Force data shows that functions with less than 25 workers generally show initial savings of only 13%. Conversely, functions with over 300 positions averaged 41 percent in initial savings. For the Commercial Activities studies you've recently announced to the Congress, what is the median number of positions (military and civilian) associated with each candidate study? Are the services emphasizing studies of larger functions or grouping of functions in order to realize larger savings?
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How many A–76 studies have involved OMNIBUS, multiple function, or complete base contract for base support? and which bases have been involved?
The GAO report indicates that maintaining military rotational positions (FAP) creates a problem with outsourcing base operations. How real is this problem?
Major General STEWART. The Marine Corps has not announced any Commercial Activities studies at this time.
The initial emphasis for the Marine Corps outsourcing and privatization effort will be the study of these functions which appear to have the greatest savings potential and which are the least contentious.
To date, no A–76 studies have been initiated, OMNIBUS or otherwise.
While consideration will certainly be given to the issue of military rotational positions, this does not appear to be a significant problem when looking at the overall effort at this time.
Mr. BATEMAN. For all witnesses, since its inception, the OMB Circular A–76 process has been criticized as being complicated and time-consuming for federal agencies to implement. In response to this criticism, ONIB recently revised the procedures for conducting public/private competitions under A–76.
How does the Department view the recent changes to OMB's guidelines for conducting public/private competitions?
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Will the changes make it easier and less time-consuming for the Department to conduct these competitions?
Does the Department have any recommendations for additional changes to the A–76 process or its implementation?
Major General STEWART. The Marine Corps believes that the changes to the guidelines for conducting public/private competitions will make it easier. It has yet to be determined that the changes will shorten the timelines for completing a study, but we are hopeful. The Marine Corps would like to see the threshhold of 10 positions before a cost comparison is required to be increased to 50. This would eliminate a lot of drawn out studies on small functions that could easily be converted to contract at the commander's discretion.
Mr. BATEMAN. What impact would elimination or a waiver of the A76 requirements have on the Departments outsourcing opportunities?
Major General STEWART. Cost comparison studies, of some description, will be appropriate in the majority of cases. The existing exemptions—where functions might be eliminated or where less than 10 FTEs are affected or where employees can be moved to other jobs—seem to be adequate. The Marine Corps is looking at competitive sourcing as a means of saving money which can only be determined up front by some sort of cost comparison.
Mr. BATEMAN. For all witnesses, the GAO indicated that the number of A–76 experts in the Department dropped considerably at the end of the 1980s.
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What is DoD and the Services doing to fill this gap in knowledge?
Has DoD or the Services reviewed the opportunity to consolidate A–76 personnel across the Services and Defense agencies?
Major General STEWART. The Marine Corps has started to train a cadre of base and station personnel, using DON training capabilities, in the skills necessary to perform a study under the A–76 prescribed methodology. It is expected that additional Headquarters personnel in various functional areas will be trained to assist the activity personnel as needed. Additionally, the DON has formed a new office, the Outsourcing Support Office (OSO), staffed with functional and acquisition experts that will be available for the Marine Corps to call on for assistance and support.
We have not considered consolidating personnel across the Services or Defense Agencies. Considering the differences in mission and programs, as well as the requirement to study functions at the local level, we do not believe there would be anything to gain by such consolidation. The Services and DOD A–76 components are in constant contact and maintain a dialogue to the extent that lessons learned are shared. All of DOD, for example, will be using the cost comparison software that was developed by the Air Force.
Mr. BATEMAN. For all Services, the Department has predicated it fiscal year 1998–2002 spending plans on savings generated through outsourcing and privatization of support privatization. Yet, in large part, specific initiatives for outsourcing and privatization are dependent on the results of studies that are currently ongoing.
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What does the service project it will save from outsourcing and privatization for each of the fiscal years 1998–2003 and, what, specifically, are the basis for the savings projections?
Major General STEWART. The Marine Corps projected savings from outsourcing and privatization are as follows: FY98–$0, FY99–$0, FY00–$20M, FY01–$43M, FY02–$64M, FY03–$88M. This estimate is based on CNA analysis of past competitive sourcing efforts which demonstrated approximate savings of 30%.
Mr. BATEMAN. What specific functions will be competed?
Major General STEWART. Specific functions have not yet been identified for competitive study.
Mr. BATEMAN. How much risk is the Department assuming by basing its spending plans on savings that are only expected to be realized and not actual?
Major General STEWART. The currently planned competitive sourcing effort is not risk free. There is no guarantee that the projected savings will be realized. There is, however, every reason to believe savings will be generated from the currently planned effort. These savings will be realized either through development of most efficient organizations or through competitive sourcing of base commercial activities.
Mr. BATEMAN. Does the Department have a contingency plan if these anticipated savings do not materialize?
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Major General STEWART. Current savings projections are based on Office of Management and Budget, Center for Naval Analysis and Defense Science Board findings of previous outsourcing efforts. Any variation of actual savings to projected estimates will be readjusted in the FYDP.
Mr. BATEMAN. How does the estimated savings in the FY98 budget address the outsourcing impediments indicated in the recent GAO study on Base Operations indicates?
Major General STEWART. The Marine Corps does not assume any savings in FY98. This is because the A–76 studies will take a minimum of one year to complete. Other impediments listed in the GAO report, institutional resistance and legislative barriers, should not be major factors in FY98.
Mr. BATEMAN. For all Services, GAO contends that conversion of military functions to civilian or contractor provides the potential for greater savings because military personnel cost more. In addition, conversions involve shifting funding from the military personnel account to the operations and maintenance account, which can take up to 2 years.
How many military personnel are currently performing commercial-type support functions and why are military used to perform commercial functions?
What specific initiatives have the services undertaken to overcome the barriers to outsourcing military personnel in support-type functions?
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Major General STEWART. There are 10,320 Marines performing commercial activities at bases and stations. Military personnel are in these functions for national defense reasons, for fleet rotation, to maintain career skills, and for supplementing shortfalls of civilian workers due to legislated FTE ceilings.
The Marine Corps has yet to functionally address the logistics of converting a military workforce to a civilian or contract workforce. Items such as fleet rotation, payroll accounts, and end strength need to be addressed.
Mr. BATEMAN. For all Services, Section 24610f Title 10 requires notification to Congress of all A–76 studies. Is there any reason why this notification does not include the costs of the proposed study(ies) and the estimated time to completion the study(ies)?
Major General STEWART. Because of the requirement to notify Congress when the Services decide to study a function, cost data is not available because we haven't completed an accurate in-house study of the function(s). With regard to estimating the time required to complete a study, our experience has indicated that, due to the various unplanned events in the system (such as protest, Congressional inquiry, etc.) that each study is an independent event with its own timeline. A notification of expected completion date would be premature and a ''best guess.''
Mr. BATEMAN. If the legal prohibition on outsourcing DOD guards and firefighters was lifted, how many guards and firefighters could potentially be outsourced? Is this essentially the same as the number of guards and firefighters in non-warfighting support positions?
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Major General STEWART. If the legal prohibition on outsourcing DoD guards and firefighters was lifted, there are approximately 600 FTEs which could potentially be studied for competitive sourcing.
Mr. BATEMAN. General Stewart, regionalization/consolidation is playing a large role in the Navy's efforts to streamline shore infrastructure.
How active is the Marine Corps is determining the focus of such efforts and its impact on the Marine Corps?
How have these activities affected the Marine Corps readiness?
Major General STEWART. The Marine Corps is following the Navy's regionalization/consolidation efforts to see what benefits there are of which we might be able to take advantage. We participate in numerous intra- and interservice groups which consider various methods to reduce the cost of infrastructure. Regionalization is one of many potential streamlining opportunities that lends itself well to the Navy because of the concentration of Naval Activities around its fleet complexes. USMC Activities are less clustered, but we are looking to participate in Navy regionalization efforts where we are collocated and where it makes good business sense.
Regionalization has not yet affected Marine Corps readiness. Marine Corps stand-alone installations, with a few exceptions, are in semi-remote locations, and regionalization offers little potential benefit. In a few locations, such as San Diego and Hawaii, there are some possibilities. For example, MCAS Miramar will receive services from Public Works Center (PWC) San Diego, and the Marine Corps will participate in the regional family housing pool.
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Mr. BATEMAN. General Stewart, your testimony states that between FY98–01 the budget includes $34 million for cost comparison studies.
What activities will be reviewed under these studies?
Major General STEWART. The Marine Corps is committed to studying 5000 base commercial activity billets (military and civilian) for competitive sourcing.
Mr. BATEMAN. What level of funding is allocated in the FY1998 budget for these studies?
Major General STEWART. For POM 98, the following funding has been programmed for competitive sourcing studies: FY98–$5M, FY99–$12M, FY00–$12M, and FY01–$5M.
Mr. BATEMAN. What is the current savings, by fiscal year, associated with these studies?
Major General STEWART. The current estimated savings associated with competitive sourcing studies is a follows: FY00–$20M, FY01–$43M, FY02–$64M, and FY03–$88M.
Mr. BATEMAN. General Stewart, you stated that the Marine Corps is working with the Defense Logistics Agency on an initiative to improve facilities maintenance supply support.
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Is outsourcing part of these improvements?
Major General STEWART. Yes. DLA is outsourcing many of the items that it normally buys on the open market. Under this program the vendor will deliver directly to the Marine Corps customer those items that we order on the vendor's ordering system. We will no longer submit requisitions to DLA and receive stocks from their distribution depots.
Mr. BATEMAN. When will the initiative be implemented, and what are the initial costs of implementation?
Major General STEWART. We implemented this initiative in the southeast portion of the United States in February 1997. We will expand implementation throughout CONUS and Hawaii during the next year, as DLA establishes contracts for geographic regions. The cost to the Marine Corps has been negligible.
Mr. BATEMAN. Are there savings associated with the initiative?
Major General STEWART. Yes, there will be some savings, and significant cost avoidances. Although not specifically identified, DLA had KPMG, Peat Marwick do a baseline cost analysis of the operation at the Marine Corps Recruit Depot, Parris Island, the Naval Hospital, Beaufort, and the Marine Corps Air Station, Beaufort. The analysis revealed that savings will be dependent on how close we can move the ordering function to the actual technician identifying the requirement.
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Mr. BATEMAN. For all witnesses, your testimony will hopefully give us a better understanding of the environment in which industry outsources and its similar ties to government outsourcing. Does the private industry typically make wholesale reductions in personnel and budgets before trying to get savings from outsourcing? What methods does the private sector use to estimate outsourcing savings? Please provide specific problems facing the private sector in obtaining outsourced public activities?
Mr. HARNAGE. Because AFGE is an organization dedicated to representing the interests of the working and middle class Americans who make up the federal workforce, rather than a profit-generating concern, I will defer to the other witnesses to respond to these very important questions.
Mr. KAWAGUCHI. The design industry puts a great deal of stock in not only the value of its employees, but also in the amount of financial and time resources spent on training and maintaining the technological and skills level of our employees. Our industry tries through these efforts to be sensitive to market trends and in many ways not only tries to stay ahead, but often reinvents itself depending on the demands of the market. In this way, our firms stay competitive.
Outsourcing tends to take place most often at times of peak demands or when very specific specialities are necessary that our member firms do not have in-house. These short term demands do not tend to yield savings. However, when services are outsourced for long term periods, there are long term savings, not only in costs but in productivity and overhead.
This experience, however, can not be compared to the public sector. When the public sector oursources for a project, it receives the complete attention of a firm on a project, not that of a temporary individual. The firm focuses on the project or services that it has been contracted to perform and utilizes its technological abilities and internal personnel and financial incentives to ensure that the public client will receive the best value for their procurement.
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Our firms do not perceive a problem in absorbing public activities. It is only a question of whether the firm has the in-house expertise to perform the services that are expected to be outsourced. In the design field, the breadth of experience generally kept in-house by our firms can handle most of the design work currently done in-house by government agencies.
Mr. ENGEBRETSON. No one method of outsourcing is used by the private sector. Many companies that are committed to the highest levels of productivity and performance recognize that outsourcing support functions is an excellent means of achieving real savings. This realization is particularly true when the support services are not part of an organization's principal compentencies (I hesitate to use the term ''core competencies'' because it carries a very different meaning in the private sector than it does in the public sector.) The primary goal however, is to obtain highly reliable, reasonably priced, quality support services.
Personnel reductions are often misconstrued as the primary goal of outsourcing. This perception is wrong. The goal of outsourcing is to achieve greater efficiency, performance, and productivity. Personnel reductions are sometimes part of achieving that goal.
For instance. OMB has reported that the average A–76 management study in the creation of an MEO identified personnel reductions of some 16%. This result suggests that some personnel reductions are necessary if the government is to ''rightsize'' and achieve the long-term efficiencies we all recognize are vital. The issue is even more pronounced within DoD's budget where the identification of savings is essential if the Department is to meet its modernization goals.
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Again, the essence of outsourcing is not about personnel reductions but, the degree to which it results in enhanced efficiencies. The advent of commercial business and management practices alone can result in real cost savings.
Mr. CLOUDSDALE. Typically, in an attempt to lower costs, private industry tries to improve their processes and reduce staff, before going to outsourcing for additional savings. However, these attempts are rarely successful. The reason is that facility management is not a core competency of the private company. The company lacks the required technical knowledge base, its labor contracts are bundled with its primary business activities, and it lacks the broad purchasing power of a company whose core business is facility management.
Not unlike the public sector, private sector firms often find that non-competitive practices have crept into their organizations, including: difficulty in dismissing poor performers, hostile union/management relationships, autocratically run organizations, insufficient training, and restrictive work rules. Once these non-competitive practices are in place, these firms lack the ability to successfully reengineer the process. Consequently, it is nearly impossible to achieve the available savings, without sacrificing quality, except by outsourcing to a competent company.
When private firms do consider outsourcing, three distinct benefits are sought:
Mission focus: Outsourcing permits total concentration on the core mission of the organization.
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Expertise and innovation: Provided by an outside supplier who specializes in that particular line of work.
Cost avoidance through greater efficiency: Results from bringing in refined management and proprietary practices, from rationalization of support manning, and from logical reductions in personnel. However, these personnel cuts need not be done with the whack of an ax. The transition can be managed well and usually is, easing the impact on individuals and communities.
How efficient an operation can be is a technical question. How quickly the operation arrives at full efficiency is a human question, and perhaps also a political question. All parties can work together to avoid wholesale disruption by using available tools such as normal attrition, organizational reassignment, retraining, and outplacement assistance.
The Department of Defense, and the communities and personnel it directly affects, has just gone through two dauting transitions: a gigantic reduction of military and civil service end-strength and four rounds of BRAC. Neither of these transitions was easy but both were handled well with transition assistance programs. Outsourcing can be handled well also, if it is managed properly.
Private sector firms generally have good information relative to their facility management and utility commodity costs. What they lack is the detailed cost/budget breakdown for the individual and specific operations within the total facility management budget. Without this specific cost information, it is very difficult for them to compare their costs against authoritative benchmark data (such as that which is provided by BOMA and IFMA).
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However, by knowing the cost of all facility management activities, it is relatively easy for private firms to know what their savings will be by going to outside providers of facility management services through a competitive or negotiated process. These facility management contractors, armed with detailed knowledge of what the cost of specific operations should be, are able to identify areas of waste, and they have the knowledge base to correct problems and reengineer processes.
The costs of facility management, under a self-performing scenario, are well known to business owners, but not at the specific functional area level. This knowledge enables business owners to know exactly what the savings are at the higher budget level.
This contrasts with identifying support service costs in the military. Too often, individuals in uniform are regarded as a free good, as are many support services that flow into a base from sources not funded in the base budget. The effort to shift to activity based costing is going very slowly. But if the true costs of support services were ever made fully visible, the price tag would be shocking.
A point that cannot be overlooked in the DoD implementation of outsourcing: Just doing more outsourcing is by itself no sure value—you have to do it right.
The Military Services, in their rush too A–76 Studies, risk dividing up base services into functional pieces to contract out in the least efficient way possible: piecemeal, as separate out-taskings. Moreover, they may avoid the serious reductions in overhead staffs that are possible with the full shift of management responsibility to the outsourcing contractor, as is done in the private sector. Just hiring someone to do task labor does not yield true savings. You need someone to manage these activities too. The Services should concentrate on their mission and let experts operate the base for them.
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The right way to do this is called Integrated Facility Management, as identified and strongly endorsed by the Defense Science Board Task Force on Outsourcing and Privatization. It's not enough to bring the contractor in—you have to take the government management out. The Services have not fully accepted this yet.
Several issues and impediments face the private sector in offering outsourced services to the Department of Defense:
Procurement Process: Tools and processes for modern outsourcing are weak or unavailable within the federal government. The acquisition/procurement process for services has received scant attention in comparison to hardware acquisition. Federal procurement officials in the field are often quite distant from procurement reform policies. The fundamental tenants of procurement reform—best-value, past performance, and performance based contracts—have not been vigorously applied to service contracting.
Lack of Information: Although the Military Services have opened the door to outsourcing, they have not yet brought the service industry into their plans in a meaningful way. The details that companies need to both understand, and respond to, greatly expanded opportunities simply have not yet been brought forth. The Services' close-to-the-vest approach will eventually result in ''cherry-picking'' by the industry, given the competitive climate and the limited advance knowledge. It takes ''two to tango''—and, the Services are currently dancing solo.
Partnerships: Perhaps the biggest single impediment is the reluctance of managers within DoD to truly partner with industry. Many are unwilling to abandon their reflexive control mentality in favor of a trusting partnership in which savings, innovation, and mission-focus flow from giving industry a freer hand in meeting the performance goals. The concept of partnership is fundamental to intelligent outsourcing, but it has not yet replaced the arms-length and adversarial relationships that often typify all but the best service contracts in DoD.
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Mr. BATEMAN. For all witnesses, several changes have been made to the A–76 process in the last few years. What do you see as the improvements made to the A–76 cost comparison process? What are the limitations that remain for the A–76 process?
Mr. HARNAGE. AFGE eagerly participated as a constructive player in the 1995–1996 reform to OMB Circular A–76. While we would not endorse the new A–76 in its entirety, several provisions which benefit both federal employees and the nation's taxpayers are worthy of mention.
For example, work can be brought back in-house under the new A–76. This provisions ensures that the process is balanced by enabling managers to reverse contracting out decisions in cases of contractor non-performance or default. The prospect of continued competition is doing much to keep contractors honest in providing services and preparing bills.
The new A–76 also includes a much greater role for employees. I think you'll agree that this change is long overdue. After all, who knows best how the federal government works and how can it work even better than those men and women who actually bend the metal and tighten the screws? Thanks to the reform, employees now have access to documents related to the preparation of the in-house bids and the appellate process and also play an advisory role in preparing the preliminary work statement, completing the Most Efficient Organization plan, and soliciting the in-house bid. Such enhanced involvement of employees allows for more intense public-private competition.
The reformed competition framework also encourages joint labor-management training in competing successfully under A–76. Such training ensures that public-private competition will be vigorous and thus save money for the taxpayers. It also encourages employees and managers to address any other outstanding concerns in a collaborative manner.
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While the new A–76 is a significant improvement over its predecessor, much work remains to be done before public-private competition is truly maximized.
The use of FTE ceilings by Pentagon managers still forces work to be contracted out that could be performed at cheaper costs in-house. Please see my earlier testimony for a detailed discussion of this very serious problem.
DoD has not been aggressive in training its managers and workers to take advantage of the opportunity presented by the new A–76 to maximize public-private competition. While training is encouraged under A–76, it is not required. Often funds for training are not made unavailable. Such ostensible parsimony is actually penny-wise and pound-foolish. Investing a little money to teach managers and employees how to compete successfully under A–76 pays for itself many times over in savings for the taxpayers. To the maximum extent possible, AFGE has stepped into the breach by providing training in the new A–76 to both managers and employees in installations across the nation.
(It may seem odd for the typical union to be working hand-in-glove with management; but not for AFGE. For the federal government to provide the core functions on which our national defense depends and compete for commercial activities in such a way as to ensure that they are performed in the most effective, efficient, and reliable manner possible, it is absolutely vital that federal employee unions work in partnership with managers.)
Further, DoD has been slow to update agency directives governing the implementation of the new supplement. As a result, many of the competition-maximization provisions in the new A–76 are either being used ineffectively or not at all.
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Another problem with the new A–76 (that was also a problem with the old A–76) is its lack of enforceability. In the past, AFGE had used collective bargaining grievance procedures to report violations of A–76 like the contracting out of work performed by federal employees to avoid FTE ceilings. However, a court decision held that a union could only raise violations in an agency's internal appeal system, a process that usually results in little more than a rubber-stamp of management's decisions. Denying federal employee unions the right to use traditional grievance procedures in order to force DoD managers to follow the rules and the absence of a truly independent review authority keeps the new A–76 from fulfilling its competition-maximization potential.
Finally, there are the limitations to A–76 itself, old or new. Many commercial activities are contracted out without its cost comparison requirements: A–76 can be waived. It doesn't apply to functions involving 10 or fewer employees. Emerging requirements can be outsourced outside of A–76. DoD can also avoid applying A–76 by eliminating a given function as a government activity and then privatizing it.
Those criticisms notwithstanding, AFGE stands by A–76. The ferocious and often fallacious criticisms of A–76 made by contractors reveal less about A–76 and more about their profound discomfort with and distrust of real public-private competition. Unlike some of our contractor friends, however, AFGE and its members are not afraid of genuine competition.
Mr. KAWAGUCHI. The most recent positive change to the A–76 process has been the implementation of Activity Based Costing. It is hoped that through the increased utilization of this procedure, the true overhead of government operations (facilities and personnel cost) will finally be included in a cost comparison.
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However, the continued utilization of the Most Efficient Organization (MEO) process continues to hinder A–76 Comparisons. Through the MEO concept, agencies are able to create a perceived set of improvements in their operations and structures in order to compete for an activity. These ''improvements'' are too often unrealistic to implement and, because of the lack of mandatory implementation, are often cast aside after award of the activity to the pubic sector.
There is no question that despite some improvements, the A–76 process remains unfair and time consuming. Time would be better spent determining wholesale those activities that could be more efficiently and financially performed by the private sector and outsourcing them as opposed to performing an activity by activity process.
Ms. ENGEBRETSON. The A–76 process has been improved through the implementation of the revised circular. One key series of improvements addressed cost areas that were typically the source of much ambiguity and imprecision (e.g., overhead, severance, and contract administration). In these areas, OMB appropriately instituted prescribed percentages to be utilized. The revised circular also provides for expedited cost comparisons for smaller functions. These small-function studies actually make up the vast majority of studies done. Thus, this change should prove to be very beneficial.
The process still has its limits, however. For instance, study times remain too long. While some of the services are able to complete studies in less than a year, others' study times drag on much longer, causing disruption and concern within the workforce and the private sector. These delays are not of any value and appear to result from such factors as command changes, general foot dragging, and so on. Studies can and should be turned out quickly. Frankly, no private sector manager would tolerate the unnecessary delays that seem to characterize the A–76 process.
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In addition, the competitions conducted under A–76 cannot yet be termed ''fair'' in the genuine sense of the word. Government accounting systems still do not provide the kind of comprehensive cost data that is required of the private sector and is necessary for an effective cost comparison; the public sector is not, as a matter of policy, held to the same (or even similar) assessment of non-cost factors (e.g., past performance, technical and management quality) that are routinely applied to the private sector; and we have lately seen several cases in which the process has been negatively impacted by command level decisions to halt the process prior to exploring private sector options, sanction the submission of MEOs which clearly do not comply with the published solicitation, and more.
In short, while there is a strong commitment among the senior leadership at DoD to utilizing the benefits of competition in a meaningful effort to assess the most efficient and productive means by which to perform its commercial functions, that same commitment is not necessarily shared throughout the command level and buying activities. This is disturbing because we believe this commitment should be shared by all concerned.
Moreover, while the cost accounting problem is relieved by some of the changes to A–76 and by the use of Activity Based Accounting (as required by the Government Performance Results Act), some of the services have indicated that they will not be moving to such systems due to the costs involved. Yet the ironic reality is that unless we are able to establish a uniform and accurate accounting process, the Department's ability to maximize its resources will remain elusive.
Similarly, 10 USC 2461/62 requires that decisions to outsource be based on the lowest cost, rather than on the more logical basis of what represents the best value to the taxpayer. This must be changed. The statute makes it almost impossible to apply ''best value'' principals to the public sector, while private sector offerors are routinely evaluated on such a basis. This dichotomy ignores what is now the dominant procurement approach throughout government (''best value'') and creates an apples-to-oranges comparison that denies the government the opportunity to pursue and achieve the best value sourcing for services. For this reason, CSA has testified in favor of a change to this statute, in which the references to cost would be replaced by references to ''best overall value''.
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Mr. Chairman, we, as an industry, are fully committed to competition. What we have now, however, cannot be defined as ''fair'' competition. We have, nonetheless, seen a number of indications that DoD and OMB are genuinely committed to improving the process and hope that this committee will support those efforts and continue, of its own accord, to seek other means by which the process can be enhanced.
Mr. CLOUDSDALE. The best changes to A–76 have been in three areas:
Requirement to use set values and percentages for government cost elements that were previously subject to a great deal of creative accounting.
Requirement to audit successful government bids for promised savings a year after the competition.
Much closer attention to A–76 competition at senior echelons of the Military Services, with tool kits, timelines, and other process elements being provided rather than home-made. some echelon-two commands have actually taken over the A–76 process for planning and oversight, which should bring truer and more objective results.
Major limitations still remain on the A–76 process. This is a more level playing field, but it is certainly not flat:
The basic concept of public-private competition embodied in A–76 flies in the face of a wise, long-standing policy that the government should not compete with its citizens; work that can be procured competitively from private-sector sources and performed competently by them is not to be done by the government. The hardware world has embraced this approach 100%—all items of military hardware are now made by the private sector. But services—garden-variety support work not inherently governmental in nature and routinely available from the Yellow Pages—are still retained for costly and inefficient performance by federal civilian and military personnel. A–76, at its best, represents a hugh gulf between wise policy and unwise practice.
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A–76 is justified on an utterly false premise: that the government can be as efficient as the private sector. While the details vary from situation to situation, the fact that the greatest savings flow from private sector solutions is absolutely undeniable. All studies confirm this. The private sector has totally embraced outsourcing not as workfare but rather as the efficiency needed to remain cost-competitive, innovative in non-core areas, and focused on mission.
A–76 does nothing to deal with transition management for the federal workers involved. This creates uncertainty and fear while at the same time delaying until the very last minute the decision that most affects the workforce. Intelligent engagement of community issues, labor relations, and political realities flow best from the earliest possible decision on who will do the work. A policy choice to shift to private sector sources permits transition issues to be handled much more smoothly and kindly than an A–76 shootout.
The 10% advantage given the government side of the competition maintains an uneven playing field.
The function-by-function approach inherent in A–76 fails to take notice of increased savings that flow from integrated facility management, as well as the transfer to the private contractor of the entire management responsibility for installation support.
Nothing in A–76 requires the management structure on the government side to change if the private sector prevails. Consequently, nothing in the process automatically yields a revised (and radically downsized) government management team to better deal with a now contracted-out workforce and a fully capable IFM contractor.
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Mr. BATEMAN. Mr. Harnage (AFGE), you mentioned in your testimony that the AFGE is working to help federal agencies during this era of downsizing. Has the AFGE developed any partnerships with the private sector to develop better methods of integrating downsized civilian personnel into the private sector?
Mr. HARNAGE. No. However, AFGE consistently supports legislation that provides displaced federal employees with priority placement for other government positions and job training and counseling for suitable jobs in the private sector. AFGE also supports initiatives that would boost the pay and benefits of federal employees taken on by contractors to ensure that these firms don't generate efficiencies simply by providing their workforce with low pay and few benefits. AFGE also supports a union successorship provision that ensures the working and middle class Americans who formerly worked for DoD receive effective representation in their new private sector workplaces.
Mr. BATEMAN. Mr. Harnage (AFGE), the recent AFGE/Hughes Electronic Corporation contract in Indianapolis sets a new standard for public sector privatization opportunities, particularly for privatization-in-place. Has AFGE explored the potential for similar contracts of services NOT privatized in place?
Mr. HARNAGE. Yes. It is longstanding AFGE policy to follow work that has been privatized into the private sector. This policy is obviously of some concern to those contractors who generate false (and cruel) economies by simply taking advantage of working men and women not fortunate enough to be represented by strong unions.
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Mr. BATEMAN. Mr. Harnage (AFGE), your testimony discusses problems last year between your organization and DOD.
Have these problems been successfully resolved?
What issues remain?
What role does your organization play in DoD's civilian downsizing goals?
Mr. HARNAGE. Although this is a tumultuous era for DoD employees and those who conscientiously represent them—what with drastic downsizing and privatization mania—AFGE has consistently managed to play a constructive role. It would be easy to do little more than carp and complain, a position that has been adopted by some lesser federal employee unions. AFGE's members, however, prefer to be lighting candles instead of cursing the darkness. And I think the principal reason AGFE has managed to be so constructive is that we are not anti-competition; rather, we are whole-heartedly, unreservedly, and non-negotiably pro-competition. This position finds support among the taxpayers and all reasonable politicians, whether they be Republicans or Democrats.
As discussed in my testimony, AFGE continues to work with DoD to: Ensure that DoD allows fair competition for the Kelly and McClellan workloads if the Congress does not force the agency to abide by BRAC and consolidate the work at the three surviving Air Logistics Centers; ensure that DoD allows the depots to perform all core work and compete fairly for all non-core work; provide training and directives to managers and employees concerning the new A-76; discontinue the wasteful practice of managing by FTE ceilings instead of budgets; and improve both labor-management relations and the agency's business practices through the partnership process.
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On issues related to depot maintenance, AFGE and DoD have engaged in a constructive dialogue. And the Administration made a commitment to AFGE last year to ask for this union's input on privatization proposals as they are being formulated. However, DoD has already submitted a proposal to the Congress that would drop all formal cost comparison requirements for privatizing utilities on military installations which clearly defies the Administration's policy of ''competition, not contracting out.'' A proposal to further privatize military housing will also soon be forwarded to the Congress without benefit of AFGE's advice for maximizing public-private competition.
While we have worked with DoD to design buyout incentives, priority placement systems, and training and counseling programs for displaced workers, our main role is to keep DoD honest—sometimes through the partnership process, sometimes through the courts. For example, we have attempted to prevent DoD from wastefully downsizing employees by managing by FTE ceilings. On other occasions, however, we have taken legal action against DoD when it attempts to downsize by violating such important statutes as the Arsenal Act and BRAC.
Mr. BATEMAN. Mr. Kawaguchi (ACEC), your testimony raises the concern that public agencies are reaching outside of their missions, and are now competing in the private sector.
In general, is such competition limited to traditional government services or does it involve areas of private sector expertise? Please provide some examples of such activities.
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In your opinion, is this a problem you see expanding in the future?
What has been the impact of such activities on the private sector?
Mr. KAWAGUCHI. Not only have public agencies continued to maintain more and more work in-house, but agencies such as the Tennessee Valley Authority and the Army Corps of Engineers have begun to market their services to local governments and the private sector in both the domestic and international markets. Particularly in the environmental area, these agencies, and others such as the U.S. Geological Survey, have aggressively allocated portions of their budget to market their services in order to develop other streams of revenue. Their use of government facilities and limited overhead consistently puts competing private sector firms in a financial disadvantage.
The recent recommendations by the Administration to promote ''entrepreneurial'' government are expanding the problem, not controlling. Unless these entities divest themselves of their governmental advantages, the playing field will continue to be unfairly tilted in their direction.
The impact on the design profession has been to loose traditional opportunities particularly with state and local governments. Although no specific numbers are yet available, loss of these traditional opportunities will hurt many firms bottom line, and will likely cost jobs in firms across the state or region.
The Architectural and Engineering field's technological and industrial advancements are being in large part driven by the private sector. Our field is increasingly utilizing the vibrancy of these achievements to export its goods and services internationally and to assist the United States in promoting trade beyond our borders. However, when our industry is forced to focus its energies not only in retaining traditional opportunities but competing against the government domestically and internationally, it forces us to lose focus on the proactive, revenue producing, trade promoting opportunities that we should be seeking. In order for our industry to maintain their proactive focus, the Federal Government should limit their activities to those essential functions that will not impede or compete with the private sector.
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Mr. BATEMAN. Mr. Engebretson (CSAA), your testimony addresses many of the benefits gained from outsourcing non-core services. In fact, several federal agencies (Office of Personnel Management and NASA) have taken this one step further and successfully privatized entire departments and programs in the last few years.
What specific government services would you recommend for outsourcing or privatization?
Are there any DoD programs you feel could be successfully privatized?
Mr. ENGEBRETSON. Any functions that do not fall within the acknowledged definition of ''inherently governmental'' (as defined in OFPP Policy Letter 92–1) should be considered for possible outsourcing. The DoD, and the government as a whole, need to look carefully, aggressively, and comprehensively at all commercial activities currently performed by government personnel and determine if the taxpayer's (and, in DoD's case, the warfighter's) interests are best served by the status quo or by outsourcing. We need to inject within government, wherever appropriate, an ethic of competition and meaningful management review if we are ever to get the budget under control and, in the case of DoD, identify the funds that will be needed to achieve modernization goals.
Finally, in conducting these assessments, all reasonable management options—outsourcing, privatizing, teaming, partnering, or even in-house performance—need to be examined without bias and with a serious commitment to achieving best value sourcing.
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Mr. BATEMAN. Mr. Engebretson (CSAA), you state that the Freedom From Government Competition Act (H.R. 716)
How does the process under H.R. 716 differ from the current A–76 process?
How does H.R. 716 determine the ''best overall value to the taxpayer''?
How does H.R. 716 provide for fair and appropriate policies to deal with federal employees affected by outsourcing?
Mr. ENGEBRETSON. The process contemplated under HR 716 will be designed by OMB to meet the requirements of the Freedom from Government Competition Act. Iit is our expectation that the methodology developed will overcome many of the shortfalls still found in A–76. A–76 will likely serve as the foundation but, as noted above, changes will be needed to accomplish the best value sourcing required by the Act. Our hope is that it will be made more rational, streamlined, and equitable.
The legislation also makes clear, I believe, the expectation that the processes devised by OMB will consider the impacts on federal employees and ensure that effected federal employees are provided appropriate support. CSA strongly supports the adoption of such policies and believes attention must be paid to such issues as pension portability and access to contractor employment opportunities.
Mr. Chairman, I hope these responses help the committee in its deliberations. Competition should be the key ingredient in making outsourcing decisions to ensure that performance, within the public or private sector, is retained at high levels of efficiency and quality. That is why competition does not end with the award of a contract or a decision to retain work in-house. Competition continues over the life of a function and, when there is any question as to whether the services are being delivered in a manner representing the best value to the taxpayer, the work involved should be recompeted. The marketplace is highly competitive and can be leveraged for the benefit of DoD and the American taxpayer.
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Mr. BATEMAN. Mr. Cloudsdale (Johnson Controls), you mention that as a facilities support contractor, Johnson Controls prefers fixed-fee versus cost-plus contracts.
What are the benefits to fixed-fee contracts?
How are changes in requirements managed under both the fixed-fee and cost-plus contracts?
Mr. CLOUDSDALE. Fixed-price contracts gives DoD the price assurance needed to budget confidently. They also give the contractor an incentive for efficiency, as well as freedom to innovate. This is often missing in cost-based arrangements where government managers feel obliged to be involved with every contractor decision.
For the fixed-price contract, changes in the requirements baseline can be swiftly handled in a formal negotiation process. Likewise, if resources change, the contractor can quickly negotiate a scope-change proposal to keep requirements in line. Under a cost-plus contract, requirements are often fuzzier, the assumption being that if the customer asked for it, he wants it and will pay for it. But DoD is a complex customer. Resources controlled at one place are not always reconciled with requirements generated somewhere else. This problem is often exacerbated by the contractor's natural desire to satisfy his customer (especially if an award fee is at stake).
Finally, many contractors are reluctant to assume the risk of a fixed-price bid and the responsibility of resource-constrained performance. Johnson Controls prefers fixed-price as the best way to achieve the goals of both parties.
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Mr. BATEMAN. Mr. Cloudsdale (Johnson Controls), your testimony advocates an Integrated Facility Management (IFM) approach to contracting support functions.
In your opinion is the Department of Defense currently using the IFM model?
Do any of the current A–76 studies underway in DoD utilize the IFM model?
How does the IFM model differ from a Base Operating Support (BOS) contract and the OMNIBUS contracting at Vance Air Force Base (OK), Ft. Irwin (CA), and the Navy bases at Bangor (ME) and Kings Bay (GA)?
What difficulties have you experienced in working with the Military Services in the outsourcing of base services?
Mr. CLOUDSDALE. The U.S. Army's facility management contract at Kwajalein Atoll, Marshall Islands is a DoD contract that reflects the integrated facility management model. To our knowledge, there are no other DoD contracts that currently embrace IFM.
At this time, it is unclear whether any of the A–76 studies currently underway in DoD will go to a full IFM model. Nothing precludes this, and indeed many senior DoD officials would welcome the full-savings potential if IFM. The Defense Science Board Task Force on Outsourcing and Privatization said in its August 1996 final report:
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The Task Force urges DoD to employ the integrated facility management approach for all military installations and facilities. However, because of the scale and complexity of base support requirements at many DoD installations, the Task Force recommends that each of the Services conduct pilot programs at two major bases prior to the across-the-board implementation of this outsourcing strategy . . . One IFM contract be awarded to a single vendor (or vendor team) per site.
The IFM model differs from the existing base operating support (BOS) contracts cited in at least three fundamental ways:
Management: Bringing the contractor in gives you BOS. Taking the government out yields true IFM. In our commercial contracts, we normally deal with a tiny handful of managers on the customer side, usually fewer than 10. If DoD is to gain the full efficiency of true IFM, it needs to adopt a lean-and-mean management style that eliminates duplication and micromanagement. In true IFM, the owner of the enterprise transfers to the IFM firm or team the entire responsibility for management and quality assurance, not just task performance. In BOS, although the government has purchased full management and full quality assurance from the BOS contractor, the government's own bloated management team and its own system of quality assurance remain in place. Limiting its IFM oversight team to less than 1% of the total workforce is an essential step for government if it to gain IFM's full benefits.
Performance-based: The BOS contracts in place are detailed specifications of how the work is to be done, not what is to be the result. Until the Services embrace performance-based contracting for services as they have for hardware buys, true IFM and its savings cannot be achieved.
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Length of Contract: Short contracts (3–5 years) and constant recompetition, which threatens to remove the contractor, preclude innovation and savings that investment in more efficient systems and processes would bring. Our commercial contracts are long term. In addition to quality and efficiency incentives, nearly all of our private-sector contracts permit either party to terminate for convenience on short (e.g., 30 days) notice. This makes the IFM contractor care a great deal about customer satisfaction. And, the customer cares that the project is profitable for the IFM contractor.
Soldiers who trust their lives to contractor-built hardware nonetheless maintain great reluctance to consider private-sector sources for support services. In addition to the details discussed throughout these responses, difficulties exist at very basic levels.
There is a large gap between policy and practice, between senior intentions and field-level execution.
Needlessly large cultural barriers exist that stem from misplaced loyalty, holding workplace stability to be a higher value than mission accomplishment. Nor has the strategy to pay for modernization through infrastructure savings yielded a concomitant change in Service values that permits a wholesale embrace of private-sector solutions.
There is lack of knowledge of private-sector success with outsourcing and a fundamental mistrust of the philosophical goodness of entrepreneurial capitalism as a system of work accomplishment.
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The Services are burdened with the huge ownership costs of providing benefits in kind rather than in cash—DoD operates the last company towns in America.
Every year spent avoiding the benefits of outsourcing is a year of savings lost for readiness and modernization needs. We have the opportunity to make change without serious risk to mission. If we don't do it now, how will we pay for these important needs? Legislative support (in the form of the Duncan-Thomas Bill) would be very helpful in bringing service practices in line with wise and efficient outsourcing policy.
Mr. BATEMAN. Mr. Cloudsdale (Johnson Controls), based on your experiences with the Flagship Ltd. Initiatives with the Royal Navy, how is income generated by the use of existing facilities?
Mr. CLOUDSDALE. Flagship Training Ltd. (Flagship) is our joint venture established in response to the Royal Navy (RN) requirement to enter into a partnering arrangement which would provide revenue to allow RN training capacity to be maintained at existing levels via income generation initiatives.
Under the income generation process, the Royal Navy keeps our Flagship venture informed of spare capacity on a regular basis. Flagship seeks to identify opportunities for the exploitation of this spare capacity so as to promote the sale of products for which RN may act as sub-contractor to Flagship. following the identification of a potential income generation opportunity, Flagship will consult with the RN regarding RN's ability to contribute as a sub-contractor to Flagship for the provision of personnel, equipment, materials, facilities, or sites. In the event that following such consultation Flagship determines that it can utilize RN personnel, equipment, materials, facilities, or sites and RN is able to provide a firm commitment for such involvement, Flagship will invite RN to quote. If acceptable the quotation is incorporated into Flagship's proposals to its customer.
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Flagship is responsible for the sales and marketing of the products to potential customers and for the day-to-day coordination and management of the marketing activity. The RN cooperates with Flagship in its marketing effort and provides appropriate assistance and support.
Mr. BATEMAN. Mr. Cloudsdale (Johnson Controls), performance based contracts that are awarded under ''best value'' factors should be the norm in DoD contracting. What is your experience?
Mr. CLOUDSDALE. Best-value is a new concept in service contracting and has not yet totally replaced the more common, less wise least-first-cost approach to source selection. Work that requires a strong firm with deep resources and broad experience is often auctioned off to the lowest bidder, with many of the firms involved incapable of performing true IFM.
QUESTIONS SUBMITTED BY MS. FOWLER
Ms. FOWLER. Mr. Warren, there have been a number of areas where the Department is contracting out where I support its actions. Examples are housing, day care, and some activities that fall under the rubric of base operations, to name just a few. However, there also are areas being looked at for privatization or outsourcing that trouble me for several reasons. First, as you noted in your testimony, projected cost savings have frequently not been realized. Second, it is not always clear what the national security implications will be when we privatize or outsource. What criteria do the Services use when they determine activities or functions that ought to be considered for outsourcing? Who defines the ''inherently governmental''? Are there risk assessments performed before functions are contracted out?
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Mr. WARREN. For the past three decades, federal agencies have been encouraged to expand their procurement of goods and services from the private sector. The Office of Management and Budget established procedures for determining whether commercial activities should be outsourced. These procedures for determining whether commercial activities should be outsourced. These procedures, which have been the primary vehicle used to make these outsourcing decisions, include a handbook for performing cost-effectiveness evaluations. Additionally, DOD officials make decisions every day regarding whether they will provide some needed good or service using in-house resources, resources from some other government agency, or from the private sector. The ''make or buy'' criteria generally includes a determination of (1) whether the task needs to be performed in-house, (2) whether the acquiring activity owns the resources needed to perform the service, and (3) whether the good or service can be obtained more cost-effectively from the private sector or government activity.
The term ''inherently governmental'' is generally defined in OMB Circular A–76. The Circular states that it shall not apply to certain Governmental functions including those ''. . . requiring the discretionary exercise of government authority''. These include ''. . . programs requiring the discretionary exercise of government authority,'' . . . such as those ''requiring value judgements, as in direction of the national defense; management and direction of the Armed Services; activities performed exclusively by military personnel who are subject to deployment in a combat, combat support or combat service support role.'' Thus, there is a need to determine whether and to what extent various activities are specifically identified as being inherently governmental—or core functions—that should be performed by government personnel. Under 10 U.S.C. 2464, the Secretary of Defense is required to define DOD's core logistics functions, which are not to be contracted out. DOD has proposed a risk assessment process to be used in identifying core depot maintenance requirements and each of the services is in the process of determining its core requirements using its own procedures. DOD has not defined a core process or identified core requirements for other functions.
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Ms. FOWLER. Mr. Warren, you noted in your testimony that projected savings of 20 to 40 percent from prior A–76 competitions were not reliable, because among other reasons savings estimates from work that was not contracted out represent projected, rather than realized savings. The Center for Naval Analysis report on savings achieved through A–76 competitions, which has often been cited by the CORM and the DSB, falls into this trap. Has GAO gone back and audited actual savings or costs from work that is contracted out pursuant to these competitions once the contracts have matured? What have the results shown? Are there particular areas or kinds of work that, when contracted out, are more likely to result in savings? Has the Department, as far as you are aware, ever gone back and in a systematic way and looked at outsourced work to determine what kinds of work make the most sense and what kinds make the least sense to contract out?
Mr. WARREN. GAO and defense audit agencies have conducted audits of the cost and savings projections from a limited number of OMB Circular A–76 cost competitions. For example, a 1989 Army Audit Agency report summarizing the results of prior commercial activities reviews stated that for 10 functions converted to contractor performance, only $9.9 million of $22 million in projected savings were realized. Performance work statement deficiencies, mandatory wage rate increases received by contractor personnel, and higher-than-estimated contract administration costs accounted for about 90 percent of the reduction in estimated savings. Our 1990 report on OMB Circular A–76 savings projections found (1) costs of conducting the competitions were not considered in estimating savings, (2) savings figures were projections and were not based on actual experience, (3) DOD lacked information regarding modifications made after the cost study, (4) DOD's A–76 database contained inaccuracies and incomplete savings data, and (5) an error in design resulted in a computer program that miscalculated program savings.
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I am not aware of any comprehensive effort to determine what outsourcing efforts resulted in the most savings and what efforts may have been less successful. However, in general, we and others have found that contracting out was likely to be more cost-effective in those situations where rigorous competition existed for an activity. Other conditions conducive to supporting a cost-effective outsourcing include the development of a comprehensive statement of work wherein all required tasks are clearly delineated and specified performance expectations, such as quality factors and time frames, are clearly delineated.
Ms. FOWLER. Mr. Warren, one thing that has really been disturbing has been DOD's apparent willingness to contract out even when savings are not indicated—primarily to reduce personnel. As you noted on page 16 and 17 of your testimony.
One senior command official in the Army stated that the need to reduce civilian positions is greater than the need to save money. The view was reinforced by the DOD Inspector General's 1995 report on cost growth, which noted that the ''goal of downsizing the Federal workforce is widely perceived as placing DOD in a position of having to contract for services regardless of what is more desirable and cost-effective.
Clearly this is not consistent with what outsourcing is supposed to accomplish. Could you comment further on this?
Mr. WARREN. The question of outsourcing is a policy issue as well as a cost issue. Some would argue that the government should not perform tasks that the private sector can perform, even if a government activity can perform them more cost-effectively. Within the Department of Defense the question becomes, should activities determined to be noncore be outsourced only if the private sector can accomplish these tasks more cost-effectively or should they be outsourced if any private sector entity can perform the work, without regard to cost-effectiveness. This is a policy issue which must be resolved by the Congress and the Department of Defense.
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Assuming that the policy is that cost should be a factor, then outsourcing decisions should be made based on an evaluation of cost-effectiveness of competing offerors in the public and private sectors. However, if, because of personnel constraints a manager does not have the in-house resources to perform required work, the he must acquire the goods or service from the private sector, regardless of the impact on cost—unless he can get an increase in his personnel authorization or can effectively use temporary personnel. To some extent DOD managers are being required to deal with two somewhat conflicting goals. First, they must downsize their personnel, even though the level of work may not have been reduced accordingly. Therefore, if forced to outsource based on this limitation, managers may increase rather than decrease the cost of performing some operations. In this case, the personnel downsizing goal would be driving the train and would be in conflict with the Department's cost-reduction goal.
Ms. FOWLER. You know what is going here? I mean this is terrible, and it is not just the Army. I know it is happening in every one of you because you have been mandated by DoD that you have got to reduce personnel, and it does not matter whether you are saving money or not. Would anyone like to comment on this?
Contracting out Just to Reduce Personnel
Major General HOUSE. The basis for this misunderstanding appears to be confusion over positions to be studied vice positions to be outsourced. As part of the renewed emphasis on outsourcing and privatization as one of the means by which we can make our operations more efficient, we established goals for field commands to do studies and cost analyses on many of the positions that perform commercial activities. This is not the same thing as telling the commands to outsource those positions. That decision has not been made in any of the recently announced studies, and will not be made until the proper OMB Circular A–76 procedures have been followed.
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Lieutenanct General Fisher was asking Lieutenant General Schwartz to encourage his command at Fort Hood to expand the scope of their study efforts to encompass the additional positions discussed in his memorandum of 31 May 1996. He was not telling Lieutenant General Schwartz to contract out more positions, nor was he telling Lieutenant General Schwartz or anyone else to decide in advance whether to contract out or not. To help clear up the misunderstanding, we are providing Lieutenant General Fisher's response to our query on this matter:
This 31 May 1996 memorandum on Commercial Activities was a memorandum from the Chief of Staff, FORSCOM to the Commanding General, III Corps, which provided the formal written requirements to a program which had already been verbally briefed.
The Army is not asking and will not ask its field commands to contract out their commercial activities without going through the due process specified in OMB Circular A–76, along with any other applicable regulations or laws. We believe the nation's interest is best served if we compete these activities so as to determine the most efficient way of getting the functions performed, and we are pushing the field commands to look aggressively for opportunities to save in this way.
Ms. FOWLER. I would just appreciate later for the record comments on our Defense Megacenter operations from you because I am concerned where we are going with that.
DEPARTMENT OF THE NAVY. As customers of Defense Megacenters, the Navy supports any moves that would result in savings and lower our cost of doing business. We have found that the consolidation of operations and outsourcing of automatic data processing functions at Navy facilities has produced significant savings without compromising national security in any way.
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QUESTIONS SUBMITTED BY MR. RILEY
MERGERS, ACQUISITIONS, AND COMPETITION
Mr. RILEY. To what extent are you becoming concerned that, over the next decade, DoD will lose access to major corporations in the nation, because they chose not to participate in this market?
Doctor GOODMAN. I believe that DoD will continue to have access to major corporations and the technology needed to ensure our technical superiority. Although there has been significant consolidation in the industry, we are maintaining access to competition to ensure that the industrial capabilities needed to meet defense needs continue to be available. Moreover, acquisition reform will serve to expand the Department's access to leading technologies, products and firms.
Mr. RILEY. How can the government ensure viable competition, not just now but ten years from now, in the face of such concentration?
Doctor GOODMAN. We review proposed mergers and acquisition in the defense industry to ensure that there is adequate competition in all program areas now and in the future. The Federal antitrust authorities conduct their own investigations and take these issues into account as well. Despite reduced funding, the Department's acquisition strategies have prompted strong competition for key defense programs. DoD program managers encourage the widest possible U.S. industrial competition with such acquisition reform initiatives as the elimination of MILSPECS, and the use of commercial off-the-shelf products and open architecture specifications.
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Mr. RILEY. What actions are you taking to preserve a level playing field among companies, so that no one firm achieves a virtual monopoly by being able to use its financial muscle and control of supplies of major programs to push out other firms?
Doctor GOODMAN. DoD carefully reviews proposed mergers or acquisitions in the defense industry in order to assure we maintain industrial capability. The Department's merger review begins by identifying each of the programs in which the companies are competing currently or are likely to compete in the future. Four issues are examined in detail: (1) the maintenance of adequate competition for defense programs; (2) organizational conflicts of interest; (3) the potential increase of vertical integration in specific programs or areas; and (4) the potential savings to the Department of any resulting consolidation. The Services also work to promote competition in their acquisition strategies. Finally, the acquisition reform initiatives already in process also are targeted at opening defense market areas to a broader spectrum of companies, thereby promoting a more competitive environment.
Mr. RILEY. What are you specifically doing to ensure that no firm gains an unfair advantage over other firms?
Doctor GOODMAN. DoD thoroughly reviews mergers or acquisitions of significance to the Department. In response to a proposed merger or acquisition, the DoD provides information to antitrust authorities, and the Federal Trade Commission and the Department of Justice. The Department's conclusions regarding specific transactions are conveyed to the appropriate antitrust authority. The thorough review performed by the DoD not only evaluates specific program needs, but also includes an analysis of market sectors to be certain that no firm gains an unfair competitive advantage over other firms.
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Mr. RILEY. If your view is that supplier monopoly is not a problem, and it turns out that you are wrong, what is the remedy the government will pursue to redress the balance of competition in the future?
Doctor GOODMAN. When DoD reviews specific merger transactions, we analyze each and every program and market where the companies are competing, or are likely to compete in the future. We not only analyze the horizontal implications of the combination, but also the future effects on the vertical supply of critical subsystems and components. DoD ensures that reviews are comprehensive by soliciting comments from competing firms. The results of the review and any issues of concern are then provided to the designated antitrust agency, the Federal Trade Commission or the Department of Justice. That agency, in turn, conducts its own independent examination and determines what remedies, if any, are required to address issues where the potential balance of competition is at risk. Remedies instituted in the past include firewalls, nullification of exclusive teaming arrangements and divestiture.
Mr. RILEY. To what extent are you examining the problem of monopolies being subtly created in the 2nd, 3rd or lower tier supplier structure?
Doctor GOODMAN. During the merger review process, the Department examines programs and markets at all levels, from weapon system platforms to the lower tier supplier structure. We also include in our review an analysis of any teaming arrangement involving the companies party to the transaction, enabling lower level technologies, and critical subsystems and components which they may supply to others.
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Mr. RILEY. What policies are you instituting to insure that, in the future, this type of situation is adequately detected and addressed beforehand?
Doctor GOODMAN. The merger review process established by the Department provides for a thorough analysis of all corporate transactions affecting the defense industrial base. In addition, recognizing that situations of concern may occur below the prime contractor level, the DoD has asked the Defense Science Board to establish a task force on vertical integration and supplier decisions. Specifically, the Department has asked the task force to analyze the effects of vertical integration on make or buy decisions. The DoD also asked the Defense Science Board for recommendations, if necessary, to revise DoD policies, practices, or investment strategies. The Defense Science Board task force report is to be released in the May–June time frame.
Mr. RILEY. My colleagues and I on the House National Security Committee have supported the initiatives in acquisition reform. The overall goals of these reforms, as we understand them have been to reduce the cost of products and services the government buys, to improve their quality and performance, and to lower the obstacles to other firms wanting to supply the federal government.
Doctor GOODMAN. Would you agree that these have been the goals?
Mr. RILEY. The goals of Acquisition Reform are to make government acquisition faster, better and cheaper. We want to ensure that we deliver to the warfighter ''best value'' goods and services. We want to obtain these goods and services from a globally competitive industrial base. Our focus is on eliminating those government unique terms and conditions which add little or no value to the acquisition system and serve as barriers to our ability to obtain the best the marketplace has to offer.
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Creating large, near monopolies seem to be at variance with these policies. Would you not agree that it will be very difficult to either reduce costs or lower obstacles to new firms if companies are allowed to create monopolies?
Doctor GOODMAN. The Department is not involved in creating monopolies. We desire to obtain competition, after all it is competition which forces companies to control costs and improve quality. We believe that by focusing on obtaining commercial products wherever possible, either as end items or as component parts of end items, by seeking to do business with globally competitive companies, and by greater international armaments cooperation, we will ensure competition. In terms of providing for entrance into the market for new firms, we believe that access to the market for new entrants is absolutely essential to ensuring continued competition and technological innovation. In all of these matters, from the perspective of Acquisition Reform, we have chosen to allow the marketplace to determine both the issue of ''rightsizing'' and access by new entrants. In terms of what has actually happened in this area, to date, since implementing our FASA and Department-wide, acquisition reform initiatives, our awards contract and our access to commercial products from commercial manufacturers who would not enter the government marketplace previously has also increased. In other words small businesses are getting more dollars and we are doing business with more companies.
Mr. RILEY. Because concentration of power in few companies usually necessitates more (not less) regulation, can you explain how, over the next five years, the government will be able to continue to pursue the goal of decreasing oversight?
Doctor GOODMAN. Our focus is on obtaining insight, not providing oversight. What we are doing is working closer with our industry partners so that we are very knowledgeable of the progress we are making in a particular acquisition. We accomplish this by focusing on the outcome we desire and reviewing the processes the contractor selects to achieve those outcomes. In other words the days of end-item inspection, where we really did not know whether we were going to receive the product or service, until in many cases it is too late, are on their way out. Now we want to focus on making sure we know how the process is working so that we and the contractor will know when corrections need to be made early in the process in order to meet schedule, manage costs and ensure delivery of a product or service which satisfies our requirement. This approach does not necessarily reduce the amount of manpower required, it allows us to focus that manpower more effectively.
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An underpinning of acquisition reform has been the assumption that American industry would be interested in selling to the government, and that there would be real competition among firms. The exit of Fortune 500 companies that have sold their defense subsidiaries casts doubt on this belief.
Mr. RILEY. Is it not time to fundamentally re-examine the goals of acquisition reform, and add as a goal the requirement to sustain a ''level playing field'' for competition?
Doctor GOODMAN. First, let us correct an apparent misunderstanding, it has never been an underpinning of acquisition reform that American industry would be interested in selling to the government. The underpinning in this regard is that our rules made it difficult for the government to buy from American industry because in many cases our rules are burdensome and costly. Combine that with the loss of purchasing power because of our reduced procurement and other dollars and we become a less attractive marketplace for any company. What we have focused on is reducing the burden and cost of doing business with the government so that companies would not refuse to do business with us when we solicit their participation.
We are committed to a level playing field for competition between companies. We believe that the level playing field can only be accomplished by ensuring that we have an acquisition process that does not restrict the solution to our requirements to any one segment of industry. By framing our requirements in terms of performance objectives, then removing barriers to entry for those firms that have typically not done business with the government in the past, we will achieve that level playing field. At the same time, we will enhance the nature of competition not just by increasing the numbers of competitors, but by increasing the level of quality of the solutions presented to fulfill our requirements. This is consistent with our goals of acquisition reform.
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Mr. RILEY. If not, how do you intend to ensure, through acquisition reform, that the changes in the industry do not undermine some of your fundamental objectives?
Doctor GOODMAN. We intend to ensure that the changes in the industry do not undermine some of the fundamental objectives through a number of actions. The first is communications. The level of communications and cooperation with our industry partners has never been better. Through sustainment of this high level of communication, we will continue to obtain feedback on the success of our acquisition reform efforts. Another action that will allow us to measure our success in meeting our fundamental objectives is the use of metrics. Use of enterprise metrics at all levels within the department will provide indications of success or lack thereof, in achieving our objectives. Thorough examination of symptoms of lack of success, and swift, decisive action to find solutions will keep us on the path to achieving our objectives.
Mergers, Acquisitions, and Competition
Mr. RILEY. We understand, particularly in the proposed Raytheon/TI merger, that the government, over a number of years, actually paid hundreds of millions of dollars to fund these two companies to develop and build complex electronic parts. If this merger is approved, the two firms will now combine, and virtual monopoly will be established. Is this an appropriate use of the taxpayer's money?
Doctor GOODMAN. The DoD and the Department of Justice are currently reviewing Raytheon's proposed acquisition of Texas Instruments business and it would not be appropriate to comment on the review at this time.
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Mr. RILEY. We understand, particularly in the proposed Raytheon/TI merger, that the government, over a number of years, actually paid hundreds of millions of dollars to fund these two companies to develop and build complex electronic parts. If this merger is approved, the two firms will now combine, and virtual monopoly will be established. Does not this defeat the original intent of the government?
Doctor GOODMAN. The DoD and the Department of Justice are currently reviewing Raytheon's proposed acquisition of Texas Instruments business and it would not be appropriate to comment on the review at this time.
Mr. RILEY. We understand, particularly in the proposed Raytheon/TI merger, that the government, over a number of years, actually paid hundreds of millions of dollars to fund these two companies to develop and build complex electronic parts. If this merger is approved, the two firms will now combine, and virtual monopoly will be established. If the merger proceeds, would the government, to maintain competition, fund still other companies to make these parts?
Doctor GOODMAN. The DoD and the Department of Justice are currently reviewing Raytheon's proposed acquisition of Texas Instruments business and it would not be appropriate to comment on the review at this time.
QUESTIONS SUBMITTED BY MR. TAYLOR
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Mr. TAYLOR. Mr. Warren, if we were to close the books today on the implementation of three base realignment and closure (BRAC) decisions, we have actually lost money, have we not—considering costs for environmental clean-up, the money that has been given to communities to get their economies going again, money for unemployment benefits, and the fact that we haven't sold BRAC property for anywhere near what we though it was worth?
Mr. WARREN. As I indicated, one of the difficulties associated with BRAC is that it has taken longer to begin achieving savings than DOD initially thought, because up front costs were greater than expected, and land sales were lower than anticipated. DOD's accounting systems do not track precise savings from the BRAC process. Rather, savings projections are based on COBRA cost and savings estimates, used in original BRAC decisionmaking, which are refined by the services during BRAC implementation. These estimates have varied in their degree of thoroughness and consistency between the services. Consequently, we are not able to provide the precise number you are requesting. However, our work does show that while the net savings will be substantial, they will generally take longer to be realized and will be somewhat less than initially estimated.
Let me give you some specifics on data that DOD is currently reporting regarding net BRAC savings. DOD's fiscal years 1998/1999 biennial budget estimates indicate savings from the four BRAC rounds began to exceed costs during fiscal year 1996 ($100 million) and should increase each year thereafter, reaching $4.4 billion in 2001. DOD projects cumulative net savings of $14 billion from 1990 to 2001. Most environmental restoration costs as well as other BRAC implementation costs were factored into the BRAC savings projections in the biennial budget; not factored in were approximately $2.5 billion in expected environmental restoration costs for BRAC bases expected to occur beyond 2001. Once these costs are recouped, DOD expects to have annual recurring savings of $5.6 billion.
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DOD's current savings projections do not take into consideration various federal economic assistance provided to communities affected by base closures; however, it does not appear that those costs would have had a major impact on long-term savings. While we have not examined the costs of these programs for the 1995 BRAC round, our April 1996 report on Closure and Realignment Savings (NSIAD–96–67) found that total federal economic assistance related to BRAC rounds in 1988, 1991, and 1993 was about $780 million. (Also see our August 1996 report, NSIAD–96–149, which discusses the status of bases closed in 1988, 1991, and 1993.) Although we have reported on difficulties in quantifying BRAC savings, our examination of selected closures indicates that the savings from these rounds are expected to be substantial over time.
I should also note that the Army Audit Agency is now completing an audit of costs and savings estimates for 10 Army BRAC sites, and the DOD Inspector General is now initiating an audit to validate DOD's BRAC cost and savings estimates. Army Audit Agency and DOD Inspector General officials report finding a greater level of accounting data available today from which to examine BRAC costs and savings than has existed in the past, which should enhance their abilities to more fully examine costs and savings, at least on a sample basis. Thus, these new audits should provide a more current and complete perspective on BRAC savings.
Mergers, Acquisitions, and Competition
Mr. TAYLOR. To what extent are you becoming concerned that, over the next decade, DoD will lose access to major corporations in the nation, because they chose not to participate in this market?
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Doctor GOODMAN. I believe that DoD will continue to have access to major corporations and the technology needed to ensure our technical superiority. Although there has been significant consolidation in the industry, we are maintaining access to competition to ensure that the industrial capabilities needed to meet defense needs continue to be available. Moreover, acquisition reform will serve to expand the Department's access to leading technologies, products and firms.
Mr. TAYLOR. How can the government ensure viable competition, not just now but ten years from now, in the face of such concentration? What actions are you taking to preserve a level playing field among companies so that no one firm achieves a virtual monopoly by being able to use its financial muscle and control of supplies of major programs to push other firms out?
Doctor GOODMAN. We review proposed mergers and acquisition in the defense industry to ensure that there is adequate competition in all program areas now and in the future. The Federal antitrust authorities conduct their own investigations and take these issues into account as well. Despite reduced funding, the Department's acquisition strategies have prompted strong competition for key defense programs. DoD program managers encourage the widest possible U.S. industrial competition with such acquisition reform initiatives as the elimination of MILSPECS, and the use of commercial off-the-shelf products and open architecture specifications.
DoD carefully reviews proposed mergers or acquisitions in the defense industry in order to assure we maintain industrial capability. The Department's merger review begins by identifying each of the programs in which the companies are competing currently or are likely to compete in the future. Four issues are examined in detail: 1) the maintenance of adequate competition for defense programs; 2) organizational conflicts of interest; 3) the potential increase of vertical integration in specific programs or areas; and 4) the potential savings to the Department of any resulting consolidation. The Services also work to promote competition in their acquisition strategies. Finally, the acquisition reform initiatives already in process also are targeted at opening defense market areas to a broader spectrum of companies, thereby promoting a more competitive environment.
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Mr. TAYLOR. What are you specifically doing to ensure that no firm gains an unfair advantage over other firms?
Doctor GOODMAN. DoD thoroughly reviews mergers or acquisitions of significance to the Department. In response to a proposed merger or acquisition, the DoD provides information to antitrust authorities, the Federal Trade Commission and the Department of Justice. The Department's conclusions regarding specific transactions are conveyed to the appropriate antitrust authority. The thorough review performed by the DoD not only evaluates specific program needs, but also includes an analysis of market sectors to be certain that no firm gains an unfair competition advantage over other firms.
Mr. TAYLOR. If your view is that supplier monopoly is not a problem, and it turns out that you are wrong, what is the remedy the government will pursue to redress the balance of competition in the future?
Doctor GOODMAN. When DoD reviews specific merger transactions, we analyze each and every program and market area where the companies are competing, or are likely to compete in the future. We not only analyze the horizontal implications of the combination, but also the future effects on the vertical supply of critical subsystems and components. DoD ensures that reviews are comprehensive by soliciting comments from competing firms. The results of the review and any issues of concern are then provided to the designated antitrust agency, the Federal Trade Commission or the Department of Justice. That agency, in turn, conducts its own independent examination and determines what remedies, if any, are required to address issues where the potential balance of competition is at risk. Remedies instituted in the past include firewalls, nullification of exclusive teaming arrangements and divestiture.
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Mr. TAYLOR. To what extent are you examining the problem of monopolies being subtly created in the 2nd, 3rd or lower tier supplier structure?
Doctor GOODMAN. During the merger review process, the Department examines programs and markets at all levels, from weapon system platforms to the lower tier supplier structure. We also include in our review an analysis of any teaming arrangement involving the companies party to the transaction, enabling lower level technologies, and critical subsystems and components which they may supply to others.
Mr. TAYLOR. What policies are you instituting to insure that, in the future, this type of situation is adequately detected and addressed beforehand?
Doctor GOODMAN. The merger review process established by the Department provides for a thorough analysis of all corporate transactions affecting the defense industrial base. In addition, recognizing that situations of concern may occur below the prime contractor level, the DoD has asked the Defense Science Board to establish a task force on vertical integration and supplier decisions. Specifically, the Department has asked the task force to analyze the effects of vertical integration on make or buy decisions. The DoD also has asked the Defense Science Board for recommendations, if necessary, to revise DoD policies, practices, or investment strategies. The Defense Science Board task force report is to be released in the May-June time frame.
Mr. TAYLOR. My colleagues and I on the House National Security Committee have supported the initiatives in acquisition reform. The overall goals of these reforms, as we understand them have been to reduce the cost of products and services the government buys, to improve their quality and performance, and to lower the obstacles to other firms wanting to supply the federal government.
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Would you agree that these have been the goals?
Doctor GOODMAN. The goals of Acquisition Reform are to make government acquisition faster, better and cheaper. We want to ensure that we deliver to the warfighter ''best value'' goods and services. We want to obtain these goods and services from a globally competitive industrial base. Our focus is on eliminating those government unique terms and conditions which add little or no value to the acquisition system and serve as barriers to our ability to obtain the best the marketplace has to offer.
Mr. TAYLOR. Creating large, near monopolies seem to be at variance with these policies. Would you not agree that it will be very difficult to either reduce costs or lower obstacles to new firms if companies are allowed to create monopolies?
Doctor GOODMAN. The Department is not involved in creating monopolies. We desire to obtain competition, after all it is competition which forces companies to control costs and improve quality. We believe that by focusing on obtaining commercial products wherever possible, either as end items or as component parts of end items, by seeking to do business with globally competitive companies, and by greater international armaments cooperation, we will ensure competition. In terms of providing for entrance into the market for new firms, we believe that access to the market for new entrants is absolutely essential to ensuring continued competition and technological innovation. In all of these matters, from the perspective of Acquisition Reform, we have chosen to allow the marketplace to determine both the issue of ''rightsizing'' and access by new entrants. In terms of what has actually happened in this area, to date, since implementing our FASA and Department-wide, acquisition reform initiatives, our awards to small businesses have increased as a percentage of our overall dollar awards by contract and our access to commercial products from commercial manufacturers who would not enter the government marketplace previously has also increased. In other words small businesses are getting more dollars and we are doing business with more companies.
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Mr. TAYLOR. Because concentration of power in few companies usually necessitates more (not less) regulation, can you explain how, over the next few years, the government will be able to continue to pursue the goal of decreasing oversight?
Doctor GOODMAN. Our focus is on obtaining insight, not providing oversight. What we are doing is working closer with our industry partners so that we are very knowledgeable of the progress we are making in a particular acquisition. We accomplish this by focusing on the outcome we desire and reviewing the processes the contractor selects to achieve those outcomes. In other words the days of end-item inspection, where we really did not know whether we were going to receive the product or service, until in many cases it is too late, are on their way out. Now we want to focus on making sure we know how the process is working so that we and the contractor will know when corrections need to be made early in the process in order to meet schedule, manage costs and ensure delivery of a product or service which satisfies our requirement. This approach does not necessarily reduce the amount of manpower required, it allows us to focus that manpower more effectively.
Mr. TAYLOR. An underpinning of acquisition reform has been the assumption that American industry would be interested in selling to the government, and that there would be real competition among firms. The exit of Fortune 500 companies that have sold their defense subsidiaries casts doubt on this belief.
Is it not time to fundamentally re-examine the goals of acquisition reform, and add as a goal the requirement to sustain a ''level playing field'' for competition?
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Doctor GOODMAN. First, let us correct an apparent misunderstanding, it has never been an underpinning of acquisition reform that American industry would be interested in selling to the government. The underpinning in this regard is that our rules made it difficult for the government to buy from American industry because in many cases our rules are burdensome and costly. Combine that with the loss of purchasing power because of our reduced procurement and other dollars and we become a less attractive marketplace for any company. What we have focused on is reducing the burden and cost of doing business with government so that companies would not refuse to do business with us when we solicit their participation.
We are committed to a level playing field for competition between companies. We believe that the level playing field can only be accomplished by ensuring that we have an acquisition process that does not restrict the solution to our requirements to any one segment of industry. By framing our requirements in terms of performance objectives, then removing barriers to entry for those firms that have typically not done business with the government in the past, we will achieve that level playing field. At the same time, we will enhance the nature of competition not just by increasing the numbers of competitors, but by increasing the level of quality of the solutions presented to fulfill our requirements. This is consistent with our goals of acquisition reform.
Mr. TAYLOR. If not, how do you intend to ensure, through acquisition reform, that the changes in the industry do not undermine some of your fundamental objectives?
Doctor GOODMAN. We intend to ensure that the changes in the industry do not undermine some of the fundamental objectives through a number of actions. The first is communications. The level of communications and cooperation with our industry partners has never been better. Through sustainment of this high level of communication, we will continue to obtain feedback on the success of our acquisition reform efforts. Another action that will allow us to measure our success in meeting our fundamental objectives is the use of metrics. Use of enterprise metrics at all levels within the department will provide indications of success or lack thereof, in achieving our objectives. Thorough examination of symptoms of lack of success, and swift, decisive action to find solutions will keep us on the path to achieving our objectives.
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QUESTIONS SUBMITTED BY MR. UNDERWOOD
RIGHT OF FIRST REFUSAL
Mr. UNDERWOOD. Explain the process of the ''first right of refusal'' provisions of the A–76 study. I also wish clarification on whether workers are guaranteed re-employment that a grade equal to that in which they were in?
Doctor GOODMAN. The right of first refusal is covered under the Federal Acquisition Regulation section 52.207–3. this section allows an adversely affected, qualified government employee the opportunity to be employed within the winning contractor's workforce before the contractor can hire from any other source. The displaced employee hired under these circumstances is not guaranteed the same pay which he/she received during government employment. The affected employee, whether he/she takes the job or not, will receive all the benefits accorded to a displaced government worker.
Most Efficient Organization
Mr. UNDERWOOD. Please explain the parameters of determining the ''Most Efficient Organization'' when DoD retains a function. This is particularly interesting because on Guam at one study site there are 47 tasks or functions being studied and 17 of them employ fewer than 10 personnel?
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Doctor GOODMAN. DoD does not define any parameters for determining the ''Most Efficient Organization'' (MEO). The installation commander or regional authority is responsible for developing the best way to compete the requirements of the performance work statement (PWS) with their resources—in-house personnel or a mix of in-house personnel, contracts, and interservice support agreements. The MEO is then certified by an independent review authority to insure the projected workforce can accomplish the requirements in the PWS.
Mr. UNDERWOOD. Can you definitively state that a base operating contract will not be awarded on Guam? If not, can you state that a base operating contract on Guam will not allow the employment of foreign workers?
Rear Admiral SCUDI. The Navy has not decided yet whether a base operating contract will be awarded on Guam. The decision will be based on the outcome of the competition between the Government and private sector offers for the base operating contract on Guam. It will be decided based on the finding of a formal cost comparison study according to the requirements of OMB Circular A–76. This dictates the use of a structured cost comparison process to determine the most efficient and cost effective way to perform a function. During this process, the government develops its most efficient organization and submits a bid based on the same scope of work as the private sector. A final decision is not made until all interested parties have been offered opportunities to review and appeal the cost comparison decision. If the final decision favors contracting, adversely affected government employees will be offered opportunities to register for other jobs through the DOD Priority Placement Program or retraining under the Job Training Partnership Act 29 U.S.C. 1662. In addition, adversely affected employees will be offered the right of first refusal for job openings with the contractor for positions for which they are qualified, if that employment is consistent with post-government employment conflict of interest rules.
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We are aware of your concern regarding the possibility of foreign contract labor being employed on Guam and will do everything permissible under law to limit this possibility. The Navy is not aware of any statutory restriction concerning the employment of foreign workers for the types of jobs to be performed in a base operating contract, if awarded in Guam. The Navy recognizes that Section 2811 of the National Defense Authorization Act, Fiscal Year 1989, Public Law 100–456, contains a prohibition on funding for certain military construction contracts on Guam, if the work is to be performed by anyone who is a nonimmigrant alien described in the Immigration and Nationality Act, 8 U.S.C. 1101(a)(15)(H)(ii). The type of work to be covered under a potential base operating service contract would not constitute a military construction contract, and therefore would not be covered by this prohibition.
Mr. UNDERWOOD. In Diego Garcia, do they use foreign workers?
Rear Admiral SCUDI. The Island of Diego Garcia is located in the British Indian Ocean Territory (BIOT) and is administered by the British government. Diego Garcia's population consists of British government personnel, U.S. Military personnel, American contractor personnel, and third Country national employees. There is no resident indigenous population. The U.S. Navy Support Facility, Diego Garcia functions as our host command on island.
DEPOT-LEVEL MAINTENANCE ISSUES
House of Representatives,
Committee on National Security,
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Military Readiness Subcommittee,
Washington, DC, Tuesday, March 18, 1997.
The subcommittee met, pursuant to notice, at 10:02 a.m., in room 2118, Rayburn Office Building, Hon. Herbert H. Bateman (chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. HERBERT H. BATEMAN, A REPRESENTIVE FROM VIRGINIA, CHAIRMAN, MILITARY READINESS SUBCOMMITTEE
Mr. BATEMAN. Good morning. The subcommittee will come to order.
I'm going to forego making an opening statement this morning in view of the fact that we have an extensive series of witnesses to talk to us about this very important subject. And so what I would suggest to the committee is in view of the testimony we're about to receive, and the numerous sources from which we're going to receive it, that we try to keep ourselves in a mode of asking questions rather than making declamations this morning. I think we'll learn a great deal more and get a great deal more done if we proceed in that mode.
But first, let me turn to my friend, Mr. Sisisky, and ask if he has an opening statement he would like to make.
STATEMENT OF HON. NORMAN SISISKY, A REPRESENTATIVE FROM VIRGINIA, RANKING MEMBER, MILITARY READINESS SUBCOMMITTEE
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Mr. SISISKY. Mr. Chairman, thank you. I do have an opening statement. As you know, sometimes I just place it in the record, but I would like to set the stage to a degree with your permission, in a few minutes. I join with Chairman Bateman in welcoming you to this Readiness Subcommittee hearing today. We have been looking forward to your presence here for sometime so we can hear your views on one of the department's initiatives that has created a tremendous amount of anxiety over here on the Hill.
First, let me make sure that my position is perfectly understood. Contrary to what some of you may have heard or think, I am not against privatization. I'm for privatization when it makes sense and we follow the rules in deciding what should or should not be privatized. The bottom line always should be national security.
For our new members, let me restate some of my earlier comments about public depots. Our public depots are there. It really is that simple. They are our insurance in a national emergency, and while no one likes to pay their insurance bill, only an emergency can make you appreciate the fact that you have it. I also know a little bit about the history of our depots. By any standard used, they have served this Nation well. I also know that they are products of the cold war era, and might not be relevant today in their present configuration. That means some changes are in order, and I accept that. What I am concerned about is the process that has been established in the Department to make those changes. I sincerely believe that the process must allow the changes to take place in a disciplined, orderly, and efficient manner where the rules of the game are clearly understood and followed, and where we understand to the best of our ability the cost and benefits, and where the cost data is perceived to be the best available and credible. And where this is not the case, I am convinced we all suffer as individuals and as a nation.
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Now, let me go back to the issue of privatization. Privatization or outsourcing has been heralded as the best way to save money to be used for modernization. Everyone wants to save money, and privatizing some commercial activities can save money. But here also lies one issue where I can identify with some remarks made by the Deputy Secretary of Defense, Dr. White, when he said: ''outsourcing is not a universal remedy. Conditions for successful outsourcing are not always present, and the government must retain core functions to protect the public interest.''
Now, that make sense to me. What does not make sense to me is what appears to be wholesale privatization without regard to the public interest. We all know the issue of privatization of depot activities is a complex matter. And each depot faces different challenges. At the present time, I do not understand how the Department is assessing the unique requirements of the individual depots in making decisions about their future status based on that assessment. I understand it when the Department tells me that the projected cost savings are based on the presence of public-private competition. I do not understand how the Department can eliminate the public sector as a competitor and then expect to have a fair public-private competition.
I understand when the Department determines that the repair of some end item or major piece of equipment is considered core work that must be performed in depots. I do not understand when the same work is determined not to be core work and the functions do not change. And it is also hard for me to visualize how maintenance of new weapons systems that support JCS contingency scenarios can be considered not core.
I can understand when the statement is made that there will be public-private competition before an award decision is made, but I do not understand how that award decision can be made without the availability of even the most basic cost data.
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A recent Defense Science Board study concluded that $30 billion could be saved for privatizing depot activities. Already we hear claimants for those dollars. In recent testimony, we were told that the savings could be used to fund the tactical aircraft program, or additional B–2's, or some other major weapon system. Just 2 weeks ago, we heard testimony to the fact that historically the projected potential savings just do not materialize—do not materialize—as planned. While they are indeed substantial, they are less than expected, and arrived later than planned.
As one who has spent a lot of time in the business world, I understand the Department's desire to improve performance while reducing overall costs. I also understood the need to find dollars for modernization. Mr. Chairman, I hope the depot policy changes that will be addressed here today are not just budget driven, but rather they are the result from someone seriously addressing the implications of the proposed changes on our ability to execute the national strategy.
The rest of my statement, Mr. Chairman, is basically what I've been saying all year with the questions, and I ask that my entire statement be placed in the record.
[The prepared statement of Mr. Sisisky can be found in the appendix on page 944.]
Mr. BATEMAN. Without objection, your entire statement will be made a part of the record, and I thank you for the constructive statements that you've made.
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Our witnesses today will be Mr. David R. Warren, Director, Defense Management Issues, General Accounting Office.
On our second panel will be Gen. Johnnie E. Wilson, Commanding General, Army Materiel Command; Vice Adm. John A. Lockard, Commander, Navel Air Systems Command; Vice Adm. George R. Sterner, Commander Naval Sea Systems Command; Gen. Henry Viccellio, Jr., Commander, Air Force Materiel Command; and Maj. Gen. Joseph D. Stewart, Deputy Chief of Staff for Installations Management, U.S. Marine Corps.
I understand that General Stewart is filling in for an original witness, General Barnes, who is not well, and we wish him a speedy recovery.
Our third panel today will consist of Mr. Lawrence F. Skibbie, president, American Defense Preparedness Association, the National Security Industrial Association; Mr. Barry Adams, president, National Council of Industrial Naval Air Stations; and Ms. Nancy H. Schaffer, president, Zone 7, Federal Managers Association.
We welcome all of our witnesses, and look forward to very interesting testimony this morning.
With that, Mr. Warren, you may proceed.
STATEMENT OF DAVID R. WARREN, DIRECTOR, DEFENSE MANAGEMENT ISSUES, GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY JOHN G. BROSNAM, ASSISTANT GENERAL COUNSEL FOR NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION; AND JULIA C. DENMAN, ASSISTANT DIRECTOR FOR DEFENSE MANAGEMENT ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION
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Mr. WARREN. I have Mr. Brosnan, assistant general counsel, and Ms. Denman with me today. Both have worked extensively in this area.
Mr. BATEMAN. We're happy to have them.
Mr. WARREN. Thank you. If I could just have my full testimony submitted for the record, I'll briefly summarize our key remarks.
Mr. BATEMAN. Without objection.
Mr. WARREN. Mr. Chairman, members of the subcommittee, I'm pleased to be here today to discuss defense depot maintenance issues. My remarks will address four areas; eliminating excess capacity, the development of new policy initiatives for depot maintenance in the Department, practices that are currently being followed with regard to depot maintenance, and the estimates that billions can be saved from outsourcing depot maintenance.
Specifically, our work shows that the Department currently has about 40 percent excess capacity within the depot system. The Navy has made the greatest progress in dealing with this issue. However, the Army and the Air Force have been less successful.
Also, all three services are implementing actions that could lead to privatization in place of costly excess capacity.
For example, the cost of operating the Air Force's recently privatized-in-place Aerospace Guidance and Metrology Center will likely cost $13 million to $23 million more annually than before it was privatized. The Navy's decision to privatize in place a naval warfare service center will cost about $59 million more annually than redistributing the workloads to underutilized Navy facilities. These savings would offset the $243 million transfer cost in about 4 years.
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The Air Force's current plans could result in work loads being privatized in Sacramento and San Antonio depots, thus retaining, rather than reducing, excess capacity.
Redistributing the work loads from Sacramento and San Antonio Air Force depots to other Air Force depots, we estimate, could save $182 million annually. These savings would offset the $475 million cost of transferring the work loads in about 2 years.
Concerning the progress in finalizing the new depot maintenance policies, we found the policies are still evolving. The Congress last year requested and ultimately rejected DOD's proposed policy regarding depot level maintenance repair. Some changes have been made based on congressional concerns. But DOD has still not finalized this policy.
For example, DOD has reinstituted its public-private competition program and states that it intends to use competitive procedures before moving depot maintenance work loads valued at $3 million or more. However, core capability requirements have not yet been finalized; and moreover, no timeframe has been established for finalizing key draft depot maintenance policy letters. Even though the new depot maintenance policy has not been finalized, obviously maintenance strategy decisions must move forward. Our ongoing work indicates that the absence of a firm policy has contributed to delays in choosing maintenance strategies.
For example, program officials for the C–17 and F–22 aircraft told us that they are delaying support decisions partially because of the uncertain status of the internal DOD core policies, and the potential for obtaining relief from legislation regarding the workload mix between the public and private sectors.
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The last area that I will comment on relates to the views on the accuracy of the savings tied to outsourcing depot maintenance.
The Commission on Roles and Missions and the Defense Science Board maintain that those savings could be as much as 20 to 40 percent. However, we found that these assumptions are based on projected savings from competition for base support type activities. We believe these activities are not comparable to depot maintenance activities. Depot maintenance activities require higher level skills and much larger capital investments. Further, the support activity competitions are conducted in a highly competitive environment. However, our analysis shows that that's not the case for depot maintenance programs.
Since the beginning of fiscal year 1996, 91 percent of depot maintenance contracts were sole-source contracts; and in terms of dollars, that represented 86 percent of the dollars that were contracted out.
In conclusion, deciding the future of the depot maintenance system is obviously a difficult task. However, inefficient depot maintenance activities will result in less than optimum use of operation and maintenance funds. Customers will continue to pay more for services than they necessarily should if we had a more efficient system.
Depot maintenance outsourcing should be approached carefully allowing for the evaluation of economic readiness and statutory requirements that surround the individual workloads.
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In our view, DOD needs to provide Congress with a plan that clearly defines how it would deal with this complex set of issues.
Mr. Chairman, that concludes my summary, and I would be happy to answer any questions you or the members have.
[The prepared statement of Mr. Warren can be found in the appendix on page 952.]
Mr. BATEMAN. Thank you, Mr. Warren.
If you would, can you elaborate further on this amount of noncompetitive outsourcing? If I made the correct notation, 91 percent of the work——
Mr. WARREN. We requested—and that was data provided by the Department. They provided information on some 15,000 contracts that were let starting in fiscal year 1996 up through the first part of 1997. And, again, what that data showed is that 91 percent of those were in fact sole source. And as I said, 68 percent of the dollars associated with that were sole source as well.
The primary reason that we were given that, and I think we reported this to the committee last year, technical data rights were the primary cause for going sole source, as identified to us.
Mr. CHAMBLISS. Mr. Chairman—you said 68 percent, and I believe you said 86 percent——
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Mr. WARREN. I'm sorry, 68 percent is the correct——
Mr. BATEMAN. Sixty-eight is the correct percentage?
Mr. WARREN. Yes, sir, of the dollars. Ninety-one percent of the total when you take the number of the contracts. I'm sorry if I misspoke there.
Mr. BATEMAN. And the basis for this significant amount of sole sourcing is the technical data that is reposed only in a single source?
Mr. WARREN. Yes, sir.
Mr. BATEMAN. Is that something that is expected to go away, or is that a problem that can be fixed if you continue the outsourcing?
Mr. WARREN. Well, it certainly, I think, could be fixed. But it would be at a cost. In other words, the data rights would have to be purchased, and that would cause an additional cost to the Department. But that would be the fundamental solution. But it is a difficult one.
Mr. BATEMAN. In terms of public-private competition, has that competition been properly structured so that the cost of both the public and private competitors are properly measured?
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Mr. WARREN. I think it's fair to say that that's been a continuing area of controversy as to whether or not that there is in fact a level playing field in terms of the comparisons of the costs. There have been a number of things that have been done over the last several years to improve the cost comparability handbook, and there are a number of things now that are being further proposed to get at, again, that level playing field issue.
I think in all fairness, I'm not sure that will ever be a perfect one, in other words, where we would have the public and the private sector sitting before you saying that, yes, we agree fully. But I think in fairness to the Department, they have taken a number of steps to address the comparability issue.
Mr. BATEMAN. The playing field, you think, has been made more level, but not level, is what I take it you're saying?
Mr. WARREN. I think that's a fair statement. I think—it has been made more level; however, I think there are still some issues out there that people would raise to say that they would like to have those further looked at. But I think to the Department's credit, they are working very hard to acknowledge and identify what those areas are and make adjustments to the comparability handbook, and put in provisions for audits and things of that nature to get the best understanding of costs possible.
Mr. BATEMAN. What has been the experience with outsourcing or privatization in terms of cost acceleration as you move through the contract?
Mr. WARREN. As I mentioned in my brief statement, the one example that we have that we have been tracking is the Newark facility. And in that case, they are in fact in process. The estimate that we gave is that the cost now for fiscal year 1997 will be $13 to $23 million greater.
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The reason that the analysis was initiated, in addition to our own interest in that area, is that the customers within the Department of Defense were noticing increases in their costs as they were being provided from the new provider; in essence, the privatized facilities. So they asked that some studies be done to see if they could determine what was going on there.
The preliminary information indicates that one of the cost drivers is a high level of—or a higher level of Government furnished material being provided to the contractor than was previously provided to the organic facility.
I think it's also important to note that that is only 1 year's data. This is the first time we've had a chance to take a look at that. It's also important to note that the increase that I identified represents an 18- to 31-percent increase over prior costs. So, again, that's something we're tracking. That is, I think, the best one that we have.
The Louisville facility that I mentioned is another case where we're getting some early data. And as I said, it looks like there the cost difference is going to be about $59 million as opposed to taking the option of transferring that to other underutilized Navy facilities. There would be a 4-year payback. I don't want to paint—2-year, excuse me, payback; but I don't want to paint a rosy scenario that there are no costs associated with transferring this workload, because in fact there are, and I think that's important to consider in any cost analysis that's done of these particular issues.
Mr. BATEMAN. Well, is there dispute as to the accuracy of these estimates?
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Mr. WARREN. I would say we in the Department are not always in agreement on the numbers. However, we have to to the best of our ability—let me take the Newark example first.
We used the Air Force's methodology for computing those costs. I think there we're probably going to be pretty much in agreement in terms of the methodology used. Now, if we're not, that will be something obviously our team would have to take a look at.
With regard to the Louisville facility, there is some disagreement between our analysis and the Navy. We think that as you move new workloads to a gaining facility that it's appropriate to capture the cost savings that are going to come from your overhead reduction for all of the workload in that facility, because it's going to, in fact.
The Navy's analysis, while they recognize that there will be some overhead reduction, they only capture that piece that relates to the workload that's being moved. So that's one area of where we have an area of disagreement.
So I guess as in any set of analysis, there's not always—but we have tried to work very closely and made our approaches very open to the Department in terms of what we're doing, how we're going about it, and we've attempted to use their methodologies where possible, and also we have relied on BRAC methodology, something that was at least consistently agreed as a basis for looking at cost in these types of situations.
Mr. BATEMAN. Thank you, Mr. Warren.
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Mr. Sisisky.
Mr. SISISKY. Thank you, Mr. Warren. It's good to see you again, and your staff. And I thank you for this preliminary report.
You mentioned Louisville in the staff report that——
Mr. WARREN. That's a comment right now with the Department.
Mr. SISISKY. I appreciate that. I don't want to put you on the spot. Last week I asked you whether you got complete cooperation from the services in opening their books, and you replied they had been cooperative. I'm sure they were cooperative, but my question is focused more on the issue of whether they had good numbers for you to look at. In some cases, I recall your analysis saying there was simply no figures available, with respect to Louisville, for example.
And one of your GAO reports on privatization in place at Louisville has sections titled: ''Navy's preliminary cost analysis is inaccurate and incomplete, and those transition costs estimates are inaccurate.'' You know, those are pretty straightforward statements.
Would you, Ms. Denman—and I've heard her talk about this—care to comment on your conclusions about Louisville as well as your access to Navy cost figures, and how the Navy pulled them together. Would you—I'll add on, if you don't mind, but both of you were active in that. And I'd like to hear particularly for members of the committee that do not know what really happened down there.
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Mr. WARREN. I'll just start and then I'll turn it over to Ms. Denman who is intricately involved in the analysis. I do not want to leave the impression that we had a technical access to records' problem. Often times in our audits, and in particularly difficult ones as this one is, getting all of the data as quickly as we would like to get it is a problem. It's also a problem for the Department because they are in the throes of doing things. So I just want to set it in that context, and I turn it over to Ms. Denman to talk about——
Mr. SISISKY. Well, when they first offered that contract, were there any figures? Any?
Ms. DENMAN. The Navy was working with preliminary data at the time, just prior to the award of the contract, and we didn't get access to their refined data until the day the contract was awarded. Therefore, the report, the first report that we issued, was based upon the data that we could get and could make comments on.
Mr. SISISKY. Was that contract given by the local reuse authority?
Ms. DENMAN. The actual contract is with the Navy, the contractor.
Mr. SISISKY. Go ahead and finish. I'm sorry I interrupted you.
Ms. DENMAN. Therefore, the first report that we issued to you commented on the preliminary cost data that we had access to at that time.
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The draft report that you referred to includes the analysis that the Navy refined; and, in fact, it made adjustments in some of the areas that we had raised concerns to them. We still had some general disagreement in a couple of areas with regard to the specific cost factors. And particularly with regard to not taking into consideration the impact of the spreading of overhead for the workload that is at the remaining facilities.
Mr. WARREN. Just as a point of clarification, the local reuse authority there at Louisville, in essence, is leasing the property to the contractor, and then the contractor—or the Navy, then, is contracting with the contractor. Just so everybody understands that.
Mr. SISISKY. I'm going to read you three things that came out of Secretary Goodman's testimony and Dr. White's testimony.
The Department of Defense established three broad considerations that must be met for activities to become candidates for outsourcing. First, DOD will not consider outsourcing activities which constitute our core capabilities.
Second, a competitive commercial market—a competitive commercial market—must exist for the activity.
And third, outsourcing the activity must result in the best value for the government, and therefore, the U.S. taxpayer.
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That's pretty simple, really. Now, maybe the first one, you could say it's core. I mean, that's just a matter of looking at it. A competitive commercial market is the second one. Do you know anybody that fixes five-inch guns around the country?
Ms. DENMAN. No, sir. It's not likely that there would be a competitive market in that area.
Mr. SISISKY. And third, outsourcing the activity must result in the best value for the government, and therefore, the U.S. taxpayer.
I want to add something. When that proposal was delivered to my office, that it was—I asked were there any numbers to back that up. There were no numbers to back that up. I had to almost threaten a lawsuit personally to stop it. And strangely enough, in 2 weeks, there were numbers. But nobody could deliver them until 2 weeks when the assistant secretary came to deliver it. It just seems to me that they have broken every rule that the Department of Defense set up with the exception of one.
And Mr. Chairman, therein lies a problem in this whole privatization in place. Nobody—they are just not following what the mandates of the Department of Defense is about. And that's all I'm really talking about in this. I don't make the decisions. The BRAC made the decisions.
Everyone knows that as you put more and more things into a government-owned facility, it reduces the overhead. That's just common sense. It reduces the overhead. You can say what you want about the outsourcing and you'll always have the argument; and you said it, Mr. Warren, about public-private competition, whether there's a level playing field. But the truth of the matter is, that I could argue anyway in the public sector where they have cut the employees in half, they still have the same number of buildings; their overhead remains the same in fixing it. So the more you put in there, you reduce the overhead. And you know, that's just common sense.
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So I submit, Mr. Chairman, that the Department of Defense is not even following their own rules in this outsourcing.
Thank you.
Mr. BATEMAN. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman. And Mr. Chairman, I again apologize for interrupting you a minute ago, but I noted that difference, Mr. Warren, in 86 percent and 68 percent. Let me just make sure that I understand exactly what you said there, that 91 percent of all of the work that has been outsourced has been sole sourced.
Mr. WARREN. They were 15,000 contracts. Of those 15,000 contracts, just a number count, 91 percent were sole source. Then we made another cut to say for those that were sole sourced, what did that represent in terms of dollar value? The dollar value was 68 percent.
Mr. CHAMBLISS. OK. You and I had a discussion at a hearing last week about the Air Force depots, and the fact that your reports have consistently showed that unless the direction from BRAC is followed, and McClellen and Kelly Air Force ALC's are closed, that it's going to be awful expensive to the American taxpayer on an annual basis. I believe your figure showed it to be about $468 million a year. The Air Force has consistently disagreed with that, is that correct?
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Mr. WARREN. Yes, they have, but I think as I pointed out at the hearing last week, we have not been provided alternative numbers on that. In other words, I've heard people say that we don't agree with GAO's assumption, we don't agree with their—but I have not been provided an alternative analysis that shows where those numbers are wrong.
Mr. CHAMBLISS. OK. That's my point. The numbers that you used to arrive at the fact that it's going to cost the American taxpayer approximately $468 million a year are numbers that you received from the Air Force, isn't that correct?
Mr. WARREN. It's based on Air Force data. The $182 million I should point out is a very conservative number because that's simply going to Mr. Sisisky's point.
Simply what we did was to take the workload redistribution that the Air Force was proposing and allocated that to the remaining three depots, and calculated the impact that that would have on their overhead, given the excess—on their overhead rates given the excess capacity that existed at those facilities. That's where we got the $182 million.
A number—an additional number of about—was it 285—about $285,000, a million dollars, we believe can also be generated through the actual closure of the facilities.
So the first number we put out, 182 is simply what the gaining depots would accrue by being able to reduce their workload hour. There's an additional savings that will come from the actual closure of the facility.
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Mr. CHAMBLISS. And you've continued to ask the Air Force for those numbers, and to date you have not been provided any additional numbers, is that correct?
Mr. WARREN. I don't think we have directly—it's more that there's been a debate back and forth. In other words, when we testified before the Senate last year, there was a discussion that our numbers were wrong. The department said they would provide alternative numbers. Senator Glenn asked us to look at those numbers when we received them. Those numbers did not come forth.
Mr. CHAMBLISS. And they haven't come forward today?
Mr. WARREN. Not to date, no.
Mr. CHAMBLISS. Now, you've analyzed the privatization in place at Newark; you've analyzed the privatization in place in Louisville; you've analyzed the proposed privatization in place at Kelly and McClellen. In every single instance, am I correct in saying that your analysis shows that those four privatization in place locations will be extremely expensive to the American taxpayer?
Mr. WARREN. From a cost effectiveness standpoint, yes, sir. That's our conclusion.
Mr. CHAMBLISS. Well, I have worked very closely with the Air Force specifically on a program that I view as critically vital to the future safety of our troops all around the world. No Member of this House is a more ardent supporter of the air dominance fighter for the future, the F–22, and yet I remained concerned that this department's zeal to privatize will put the F–22 and every major new weapons system in the future at the mercy of private industry.
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In your experience, and based on what you've just told me, what effect would result if the Department of Defense sets a precedent of committing future weapons systems depot maintenance like the F–22 to the private sector through contractor logistics support agreements?
Mr. WARREN. I think the caution obviously has to be if those types of contracts ultimately end up being a sole source contract for the life of the contract, I think you have to be concerned whether or not in fact there's going to be sufficient competition to drive the life cycle costs down.
In other words, that would be the theory. However, if the competition is not there, then I think we would raise concerns about whether in fact that is going to happen. And I should also add that on the contractor logistics support, at least under the new policy the Department is proposing, that would not be counted under the 60/40 legislation, 2466, as part of that requirement.
And I think that would be also an interesting feature in that that's going to obviously have an impact on the amount of workload going into depots which would further exacerbate the problem that they have today with regard to excess capacity.
Mr. CHAMBLISS. Thank you.
Mr. BATEMAN. Mr. Ortiz.
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Mr. ORTIZ. Thank you, Mr. Chairman. And I would like to take this opportunity to welcome our witnesses. We have been working very closely with the GAO on depot maintenance issues for several years now. And, of course, you can understand our frustrations.
You know, I think that most of us have served in the military, and we are concerned for the readiness of our troops, and we cannot forget that we're all taxpayers. We all pay big, big, taxes. So we'd like to see all the savings that we can get. But let me ask you a question, Mr. Warren, what would be the impact on the Army's depot system if the Army continues to try to operate five depots?
Mr. WARREN. Well, the data would show that the current overall five depot system has about 42 percent excess capacity. So I can't give you a precise number, but obviously, that's going to mean there's going to be inefficiencies in the system. And where that really hits home is that the users, the customers for those depots, are not going to get the maximum benefit from their O&M dollars. So you're going to have inefficient use of O&M dollars is what's going to occur.
Mr. ORTIZ. And then another question, how sound is the Army's workload management system, and how well supported are budget requests for staffing?
Mr. WARREN. That's an area that we—we've not looked at in detail. Julia, do——
Ms. DENMAN. I'm sorry, I didn't understand the first part of the question.
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Mr. ORTIZ. The Army's workload management and how they manage their workload, their system, and how well supported is their budget. The workload versus the budget, how is the staffing? How is it working?
Ms. DENMAN. In general, we have seen that the depot maintenance personnel have downsized significantly over the last few years. There has also been a sizeable downsizing of the requirement for depot maintenance. The Department must deal with two different management principles. One is they have to downsize all of their personnel. And the second is they are supposed to be able to hire to the funded workload for industrial activity, such as depots.
So whereas they should be able to hire, to support whatever funded workload they have, they must also take personnel cuts that are allocated. To some extent, that may have some impact. However, in general, we have seen that the downsizing of personnel was required based upon the downsizing of the workload.
Mr. ORTIZ. You know, another issue that concerns me, and you've been looking at these issues now, as you are well aware, and you mentioned in your testimony, that we have a threshold, a limit, of $3 million. And once they go over that, they have to compete. Have you noticed where they have gone around and put some of this contract out without competing?
Mr. WARREN. I'll let Ms. Denman respond.
Ms. DENMAN. There are some instances where workload greater than $3 million has been contracted out. There was a period of time which the Department said that they would not do public-private competition, and there were workloads in the Navy, and the Army, and the Air Force, which were moving to the private sector that were greater than $3 million during that time.
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There's also the practice of hiring contractors to work in depots to augment government personnel, because they don't have enough people to accomplish the workload that they have assigned to the depot. None of that has been subject to, you know, public-private competition, and I'm—I don't know that it's a legal issue as to whether or not it should be, but indeed, that augmentation does take place within the depots.
Mr. ORTIZ. See, and this concerns us, because we did set the limit of $3 million, but we have found in many instances where they have circumvented that just to make sure that some of this work is contracted out.
Mr. WARREN. If I could add, the most specific example that we have is the case of Louisville where we directly, doing the analysis for Congressman Sisisky, stated that that 2466—or 69, was not followed.
Mr. ORTIZ. And if I may, just one more question. What must the Army do to ensure workload requirements, as the law mandates, because I feel that once they go over the $3 million and they contract this workload, in my opinion, they are violating the law.
Now, how can they ensure that the workload requirements as the law mandates, and not civilian personnel ceilings, determine where and how depot maintenance is performed? Mr. Warren.
Mr. WARREN. If I'm understanding correctly, the situation in the Army is very complicated at this point in terms of the various moves that they are considering with regard to workload. And we issued a report in the fall of last year and raised a number of concerns about how they were going about doing that. They made some adjustments in their consideration of how they might go about doing it.
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However, at this point in time, the difficulty is we do not have a firm plan on how they are going to deal with it. What we firmly believe is that they should not enter into privatization and place initiatives as long as this excess capacity situation exists.
We also think that there are opportunities for them to consolidate work loads at existing facilities, and we also recommended that they take a look at the cost effectiveness of that. They say that they feel there might be some BRAC constraints related to doing that.
We also recommended that if the cost effectiveness numbers were such that it was—it would yield a significant savings to the Department that we then thought they should come back to the Congress and ask for some relief in those situations.
But the biggest difficulty with the Army right now—I'd like to give you a better answer—but the problem is that the plans are still fluid. They know they have a lot of things on their plate to deal with this 42 percent excess capacity situation. But they really, in fact, at this point haven't put out something that we can go back in and reanalyze to say, OK, this is the effect of the strategy or the planned approach would have overall.
Mr. ORTIZ. Thank you, Mr. Chairman.
Thank you, Mr. Warren.
Mr. BATEMAN. Before I recognize Mr. Riley, let me ask this question. Taking the context of your testimony this morning, are these decisions being made on the basis of someone who has expertise on a staff developing a set of recommendations that move up the chain of command, or are these decisions made on high and being pushed down the chain of command?
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Mr. WARREN. My sense is——
Mr. BATEMAN. What's driving this?
Mr. WARREN. Go back to a little history of last year. Obviously, when the Department came before the Congress with its legislatively mandated policy report, clearly that policy report showed a clear preference for use of the private sector for the performance of depot maintenance. As I said, there was a great debate on that last year, and in the final analysis, the Congress said no, we're not comfortable with what we've seen.
So, clearly on the part of the Department, I think from a management perspective, and this flows from the Commission on Roles and Missions, [CORM], particularly, and now subsequently, the Defense Science Board [DSB], that there is a feeling that outsourcing can in fact save substantial dollars to the Department.
I think—and then that rolls into, OK, how do we proceed now on a here and now basis. The Defense Depot Maintenance Council, as I understand it, is the senior body that takes a look at the various decisions that are made with regard to these various initiatives that we've talked about.
So from that standpoint, it is done in a corporate manner, but I think it is in an environment where the management philosophy and feeling is that we have opportunities here, let's pursue them as aggressively as we can within the existing statutes.
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So I believe it is being driven from the top. I'm sure—I know there is a consideration, particularly after last year, to be more closely adhering to the various statutes that exist.
Mr. BATEMAN. One would hope so.
Mr. WARREN. Yes. But I think—again, it's a corporate approach, and it's a top down approach and direction, as provided.
Mr. BATEMAN. Mr. Riley.
Mr. RILEY. Thank you, sir.
Mr. Warren, good morning, and thank you for being here. As a freshman and a new Member here, if I understand the BRAC process, it was originally intended to eradicate most of the overcapacity problems at the depot. In my opinion, the Army can only solve this excess capacity problem when it gets down to three core depots.
Would you agree with that, or disagree?
Mr. WARREN. Clearly, reducing the number of depots is key. The one exception that I would make, the BRAC recommendations left Red River Army Depot open, and cited for readiness reasons. And so I would be reticent to challenge that decision. I think that would have to be a reconsideration of a future BRAC if that would occur to look at that decision. But notwithstanding that, that does exacerbate the excess capacity situation that exists.
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With that one exception, I agree with your statement. In other words, reducing, consolidating, bringing the depots down, is the most cost effective approach.
Mr. RILEY. Do you know of any studies that have been made, or are you even looking into the possibility of privatization in place at Red River, or at Letterkenny?
Mr. WARREN. I know proposals have been made along that line. I'm not aware of studies. Let me check with Ms. Denman.
Ms. DENMAN. There has been consideration of privatization in place at both locations. Probably a more serious consideration at Letterkenny.
It is my understanding that the Department's position has gone from privatization in place of the entire missile workload to retaining about 86 percent as a Government owned, Government operated, facility, and trying to privatize the remaining 14 percent, which still leaves the excess capacity in that——
Mr. RILEY. I guess that is my ultimate question. What happens to the Anniston Army Depot's excess capacity if these other two depots remain open?
Mr. WARREN. Well, obviously, it continues to be a problem, and as I said in response to Congressman Ortiz, that was the reason that we recommended to the Department that they look at the cost effectiveness issue of consolidating that missile workload at Tobyhanna. And so—yes—I'm sorry, and some of the work would as well go to Anniston. So that would help that situation as well.
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And the other piece I should add, because that plan is not yet finalized, again, it makes it hard to give precise answers on where this ultimately will go.
Mr. RILEY. When do you think that you will have the numbers on that?
Mr. WARREN. That I would have to defer to the Army. I suspect they'll probably give you an estimate when they come up today.
Mr. RILEY. OK. Thank you, sir.
Mr. BATEMAN. Mr. Pickett.
Mr. PICKETT. Thank you, Mr. Chairman.
Mr. Warren, you mentioned earlier in your comments the issue about cases where the Department of Defense is required to contract out for certain maintenance work and cannot do it in-house because they don't have the rights to certain proprietary kinds of equipment or——
Mr. WARREN. Well, that was the reason cited for going for a sole source contract because they did not own the data rights, yes.
Mr. PICKETT. Have you estimated what the cost of that kind of process is to get the repairs done that way?
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Mr. WARREN. From the sole source standpoint?
Mr. PICKETT. How much more does it cost to use the sole source as opposed to having competition?
Mr. WARREN. We do not have precise data on that. I think in general, whenever you're in a sole source situation, there's a heightened concern about cost escalation and the need for tighter controls on those types of contracts to assure that the Government costs are not—the Government is not paying more than necessary for the services.
Ms. DENMAN. I might add, if you do not acquire technical data during the initial acquisition part of a program, it becomes exorbitantly expensive to buy it later on.
Mr. PICKETT. Why am I surprised.
Ms. DENMAN. So for the Government to go back after a number of years when weapons are in the field and try to acquire technical data, either to get capability themselves within an organic depot, or to compete it within the private sector, the original equipment manufacturer who would stand to lose that business if someone else won it may price that data to—at such a level that it would be overly expensive to consider doing.
In the few cases where we looked at program offices that considered buying it at a later point, that was the general conclusion that they made. Although we have not done an exhaustive study.
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Mr. PICKETT. Is it a common practice to purchase equipment on this basis—that you're locked in to the supplier to provide the maintenance on it? Is that a common practice in the department?
Mr. WARREN. Well, in essence, it's been a mixed practice with the 60/40 requirement. In other words, they go through a risk assessment process. But that has not been—I think it's fair to say, that has not traditionally—and that's what we're talking about now, we're talking about a change in paradigms in terms of how we provide maintenance. Your prior model had a system where you had a fairly substantial organic capability, and then you also had a corresponding capability within the private sector. So you had a mixed system that was generally governed by the 60/40 legislation.
Ms. DENMAN. However, even if a Government depot had organic capability, you may not have had all the proprietary data that would have allowed you to go out and compete it on the open market, as we saw at both the Aerospace Guidance and Metrology Center, and with other contracts.
In other words, the Government may have the use of certain pieces of information about how to repair, but they cannot provide it to a contractor who would be in competition with the original equipment manufacturer.
At the same time, as the department moves more to performance specifications for acquiring systems, they'll be buying less data, not more.
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Mr. PICKETT. Thank you. And another subject.
You mentioned that the estimates of savings from contracting out were arrived at by the Commission on—by the Commission on Roles and Missions in a Defense Science Board report, and you go on to say that it's your view that these opinions were based on faulty assumptions about the amount of the savings, that they were relating contracting out of base operations and support activities as opposed to contracting out depot type of work.
Mr. WARREN. Yes, sir, and we went back and looked at the database. There's a database of about 2,100 competitions that were held under 8076, and most of those things were, again, base support activities. Cutting grass, for example, would be the type of thing that you might see in their trash pickup. That type of thing.
So our basic point—and I want to be clear on this, we don't wanted to come out and say that there are no opportunities——
Mr. PICKETT. I understand——
Mr. WARREN [continuing]. But what we're saying—you just don't—it's kind of apples and oranges on that. And I don't think there's disagreement on that particular point.
Mr. PICKETT. Well, you want to say that the DOD needs to provide Congress with a plan, but don't they really need to go back and start from the beginning and develop the facts to support some sort of a sensible plan about how they are going to handle the depot issue? They should not base it on the reports of the Defense Science Board and the Commission on Roles and Missions at this point, should they?
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Mr. WARREN. I would think that information from that should be part of the input. But clearly, we think there is a need to go back and take a look at comparable situations. They need to go back and solve the issue of core. They need to go back and solve the issue of what reengineering they want to do within their own depot system, what further consolidation they would like to do within their own depot system. And lay that out in a cohesive way that you can understand how all of these parts are going to come together, what depots will be affected, how many people will be affected, when this will occur, and what dollar savings we hope to achieve from this integrated approach to addressing depot maintenance. That's what we would like to see in that plan.
Mr. PICKETT. Thank you, Mr. Chairman.
Mr. BATEMAN. Mr. Jones. Mr. Jones is not here. Mr. McKeon.
Mr. MCKEON. Thank you, Mr. Chairman. I'm fairly new here to the Congress and to this committee, and this is a very interesting hearing and a very interesting debate to me. It seems that it all goes back to the purpose for which the BRAC was created in the first place because of politics; and because each of us represents a district and represents a constituency, it's very hard for us to just say go ahead and close a base in my district for the good of the country. And it seems like that process was put into place to alleviate, get rid of the politics, and we saw in this last round that that really didn't happen. And then the depots are just a further continuance of that problem.
It sure would be nice to be Solomon, and for all of us be able to put this all together and say for the best of the country, we all will step aside.
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I don't really have any questions. I'm here I think more to learn than to expound wisdom, because I don't have a solution. But hopefully as members of this committee and this Congress, we can come together and grapple with this, because I think we're all going to have to at some point look for the greater good of the country and the individual services, how they can best be served.
I appreciate your testimony and the things that my colleagues are bringing up here today.
Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. McKeon.
Next, Mrs. Fowler is a member of the subcommittee, followed by Mr. Watts.
Mrs. FOWLER. Thank you, Mr. Chairman. I apologize for being late. We try to be three or four places at once. But I appreciate your being here. And I understand some of my questions have been covered, but I wanted to pursue a little bit further on a couple of them.
Mr. Warren, I've become increasingly concerned at the DOD's continuing emphasis on this contracting out, life cycle, depot support for the new systems that are coming into the inventory. And as you note in your testimony, there are a significant number of new systems which are clearly going to be JCS scenario platforms that are likely to be contracted out pursuant to the new 5,000 series guidance. And I understand there's already been some talking about the sole sourcing, the raising of the cost. But if you could elaborate on the implications of this with regard to both anticipated costs of performing depot repairs, but also the impact of this on the long-term viability of our whole depot system.
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Mr. WARREN. Yes. As I mentioned, I think when you go into a sole source situation, obviously, we would be concerned about the cost. I don't want to leave the impression that that could not in fact be managed in some way. Perhaps it can.
But on the second part of your question in terms of, particularly if contractor logistic support and interim contractor support does not count it as part of the 60/40 requirement in terms of moving workload into the depot, the facts of that means that as new systems are introduced into the DOD, depot maintenance workload will shrink. And I think that's just the fact of the matter.
If depot—if the workload shrinks, that will mean you will have greater excess capacity at existing depots than you have today following that philosophy.
So I think that's a very important point to be considered and debated if that's the way we want to go, and again, that's part of the draft policy statement that's out there; and I think that's something that should be focused on, because that will have significant implications for the organic depot system as we move into the future.
Mrs. FOWLER. In other words, there wouldn't be a need for an organic depot system, and——
Mr. WARREN. I think in fairness, there would be a diminishing need. In other words, the older systems that are being maintained there, there would clearly probably be some readiness things that everybody would say, ''No, we don't want to get rid of that capability, it's extremely important.''
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But in general, you would see—the curve would be going this way under that concept.
Mrs. FOWLER. Well, let me ask you then, in relation to that, is depot maintenance that's performed either under CLS or ICS contracts fundamentally different from any other depot maintenance, and is there a reason why CLS or ICS should not be counted under 10 U.S.C. 2466 or under 60/40?
Mr. WARREN. We consistently maintained—we've reported on that to the Congress, I think, for the last several years, a congressional requirement that we report—we've continually maintained that we think that should be counted.
Mrs. FOWLER. Well, I agree with you, and we're going to keep on working on that, but I wanted to make sure you were still of that mind, too, because you don't see anything really fundamentally different under these contracts than what comes under other depot maintenance, then?
Mr. WARREN. I'll let Ms. Denman add——
Ms. DENMAN. The one difficulty would be that CLS involves more than depot maintenance. It also may involve material management and engineering services, which would not be categorized as depot maintenance. Therefore, the department would have to differentiate between that portion of their contract and logistic support dollars that are depot maintenance.
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However, we believe that that is a doable issue.
Mrs. FOWLER. It can be done. Great. Thank you. One other followup, and this is a little bit different, but as you know, in 1995, the DDMC was finally persuaded after going to auditor, et cetera, to change the source of support for the F1D2 derivative of the F–404 engine which powers the F–117 fighter. And it was changed from the OEM to organic depot, my naval aviation depot in Jacksonville. Have you had any opportunity to track the savings that resulted from the move of this work?
Mr. WARREN. Yes, we did, and I know we provided your staff a briefing on that. In general, the answer is that showed savings by moving it to the organic depot.
Again, I'd like for Ms. Denman to give a little more detail on the precise numbers.
Ms. DENMAN. By having the F1D2 interserviced from the Air Force to the Navy at the Jacksonville NAVDEP—we estimated a savings in the neighborhood of 40 percent over what the Air Force was paying under a sole source interim contractor support contract to General Electric. I would have to check——
Mrs. FOWLER. Yes, I think the figures you gave us were about 47 percent, and I think this is a great example of how much more money—here we've got a time when we have less money to spend for our defense, and yet if you had sole sourced the work on this one engine, which is what DOD wanted to do, and we had to move heaven and earth and get an independent auditor to come in and show that it was going to cost more, we would be paying 47 percent more for the work just on that one engine. Think how much more we're going to be spending as you go down item by item by item, and we can't afford it. So this is a great example of why we need to keep these organic depots.
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Thank you. Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mrs. Fowler.
The very patient Mr. Watts.
Mr. WATTS. I have no questions of this panel, Mr. Chairman, and I appreciate you allowing me to come in today to be a part of this.
Mr. BATEMAN. And Mr. Fazio has joined us. Mr. Fazio, do you have questions you would like to put to the witness?
Mr. FAZIO. Thank you, Mr. Chairman. I really appreciate the chance to be Daniel in the lion's den today. It is good to be back among my friends, this being the committee that I began my congressional service on. I didn't bring my flak jacket or my kevlar, but they are in the anteroom in case I need them.
I think what we all need to be doing here today, and I appreciate the fact that this subcommittee is so focused on it, is getting really beyond the more contentious and controversial aspects of this whole thing to really get the facts out on the table, and look at the central question, and that is whether or not public-private competitions will yield significant savings.
I think some people think we're still back arguing about privatization in place at McClellen and Kelly Air Force Base, for example. We're not. We've moved way beyond that. We're now engaged in a full and open competition that I believe fully complies with the law, and in my estimation will take us beyond the realm of speculation, and help us determine who can really provide the government with the best value of work.
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I'm hopeful that we have heard, although I'm somewhat concerned that we haven't, from the GAO that public-private competitions can yield substantial savings. Mr. Warren has written that in previous analyses. And I'd like to, if I could, Mr. Chairman, with your indulgence ask a couple of questions which I think might get at the issue of whether or not this GAO report is consistent with some premised on statements that have been made in the past.
For example, the GAO has been very supportive of public-private competitions as recently as its April 2, 1994, testimony to this subcommittee. The GAO recommended ''the use of public-private competition as a tool for allocating depot maintenance workload.'' Testimony at that time stated, ''While the amount of savings is difficult to quantify, we believe the program,'' and by that, public-private competitions,''can reduce depot maintenance costs.''
And in the March, 1996, report, the GAO states once again, ''The military services can substantially increase their savings by ensuring that closing depots' workloads are transferred to the most cost effective source of repair. They can accomplish this by, one, conducting public and public-private competitions for the work; or two, by analyzing the cost effectiveness of moving work to not only their own depots, but also those of other services.'' I know that makes people here nervous, but it was certainly one of the recommendations back in 1996 in that March report.
So it's pretty clear that you have historically been supportive of public-private competitions. That I see is true. I notice both of you shaking your heads. Mr. Brosnan is more stoic. But the other two of you are shaking your heads in agreement.
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Mr. WARREN. He's the lawyer.
Mr. FAZIO. He's the lawyer? Never want to indicate any biases But I guess my question is why have you, therefore, seemingly made a determination in this report before the competitions have been completed that public-private competitions for workloads both at Kelly and McClellen somehow are not going to determine the most cost effective source of repair for those workloads.
Mr. WARREN. I think we're talking about two different situations, but I would say clearly, everything you said about our view with regard to public-private competitions is true.
However, the difference here is that we're talking about privatizing in place, excess capacity, rather than reducing it. Under those other circumstances, what we were saying is when you move, for example, in a closing depot, take and compete that, and if one of the DOD depots that's left, after you've made this capacity reduction in your system, can bring that work in and do it more competitively than the private sector, we think that's a good idea to see if that will work.
The situation here is much different, particularly the Air Force I know is your particular situation, where you have five depots, in essence, and the outcome of the competition could potentially be, not that you have three depots remaining with additional workload at those three depots, but that you have the same amount of workload, yet in essence, five depots remaining so that your overhead costs are greater.
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So that is our concern, more when you're trying to deal with the excess capacity situation. We don't think that that will get you to where they're most cost effective.
Now, we would also, I should say, support the fact that they are, in fact, using a competitive process, notwithstanding what I just said, for the Kelly and McClellen situations. So we still continue to support that to say, yes, if you're going forward with this, and that's what we testified last year, because at the point we were testifying last year, it looked like that competition wasn't even going to be held. So I'm going to end up by saying that I think we're consistent.
Mr. FAZIO. Well, it may be debatable, but the point I think that I would want to make is, one, we're trying to define our core workload. And once that's done, we know that will be maintained at public facilities.
We are also attempting to downsize in all cases. We understand that's required. The overhead has got to be reduced. You didn't particularly appreciate, and I know the BRAC didn't, downsizing the five facilities. But at the moment, in my view, the goal of depot workload allocation is not to address capacity utilization rates at either public depots or private facilities, it's rather the objective to have depot maintenance workloads performed where it's most cost effective for the DOD customer.
Wouldn't you agree with that premise?
Mr. WARREN. Well, I would—yes, I would agree with that premise, but I guess our analysis is done on—from the context of the overall defense depot system and not by individual entities, if I'm understanding your question correctly.
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We've tried to look at in the context of what's the most cost effective for the entire depot system, not to take individual ''eaches,'' so to speak, and look at them.
Mr. FAZIO. You're still advocating cross-service competition, obviously?
Mr. WARREN. Yes.
Mr. FAZIO. Although that hasn't been the major——
Mr. WARREN. Interservicing. Although that's been something we brought up for a number of years and has not been embraced by the department, I think it would be fair to say.
Mr. FAZIO. Or a lot of other people.
Mr. WARREN. Yes.
Mr. BATEMAN. I think with that, we had best thank Mr. Warren, and Ms. Denman, and Mr. Brosnan for their appearance this morning and helpful testimony they have provided us.
Mr. WATTS. Mr. Bateman.
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Mr. BATEMAN. Yes.
Mr. WATTS. Mr. Chairman, can I ask a followup question——
Mr. BATEMAN. Sure.
Mr. WATTS [continuing]. To my friend from California.
My friend from California mentioned full and open competition. And let me ask, is the current competition proposal for McClellen and Kelly really full and open competition, or are there restrictions on where and how the work can be done?
Mr. WARREN. I'll let Mr. Brosnan, who has looked at the proposal in more detail.
Mr. BROSNAN. The solicitation provides that whoever wins can use the facility—I'm talking about the solicitation that deals with the C–5 workload—it doesn't, as we read it, require that it be performed in any particular location.
However, like a number of things, the fact that you can utilize this facility certainly would be a distinct advantage, and it may very well dictate that whatever offers you get will, from an economic standpoint, have to do that. But there isn't an actual requirement that you perform in a particular location. So they've certainly attempted to open it up.
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You know, it's always difficult to conduct these public-private competitions. The acquisition system really isn't set up for them. You're talking about full and open competition; the Competition Contracting Act is really set up to manage a competition among private sector sources to get it to fulfill a government need. When you add on the requirement for a government competitor, it's—it confuses things that that addition is required by 2469, which is not a part of the Competition and Contracting Act.
But I think at least in the—on the face of it, and we haven't analyzed in great detail all of the evaluation criteria, the number of equalization factors, it looks like a reasonable attempt, anyhow, to conduct a competition—a public-private competition that, as I guess is fairly——
Mr. WATTS. Well, when you say you add the public competition into the equation, it confuses the issue. So is it a full and open competition, can you answer that yes or no?
Mr. BROSNAN. I'm not really able to answer that because—I'm dancing around—the requirement for full and open competition which is in the Competition and Contracting Act, it's not absolutely clear to me that that requirement or that standard necessarily applies to a competition held as this one is under 2469. And even if it were, let's say, regular competition, I don't think that we have conducted the kind of detailed analysis of the solicitation that would make me comfortable in saying, yes it is, or no, it isn't.
As you may know, the General Accounting Office does hear bid protests under the—operates under the Competition and Contracting Act, and often prospective offerors will complain about a particular provision in a solicitation. And, of course, the basis of their argument is it's not conducive to full and open competition. We decide those kinds of issues when we've had an opportunity to analyze the arguments on both sides in sort of an adversarial process. And in fact, it actually would happen in one of these solicitations.
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So at this point, I don't know if I could safely say one way or the other.
Mr. BATEMAN. Thank you very much. In the interest of being able to hear the witnesses from the Department of Defense, we again thank you for being present and for your very helpful testimony.
Mr. FAZIO. Thank you.
Mr. BATEMAN. Our second panel, I'll reintroduce, consists of Gen. Johnnie E. Wilson, commander, Army Materiel Command; Vice Adm. John A. Lockard, commander, Naval Air Systems Command; Vice Adm. George R. Sterner, commander, Naval Sea Systems Command; Gen. Henry Viccellio, Jr., commander, Air Force Materiel Command; and Maj. Gen. Joseph D. Stewart, Deputy Chief of Staff, Installations Management of the United States Marine Corps.
Welcome to all of you, and General Viccellio, I'm told that you're going to be retiring soon, and this may be the last time you appear before the committee. We welcome you back, and I don't want the opportunity to pass without thanking you for your very distinguished career in the service of the country and the Air Force.
General VICCELLIO. Thank you, Mr. Chairman.
Mr. BATEMAN. Now we'll turn to General Wilson.
STATEMENT OF GEN. JOHNNIE E. WILSON, COMMANDING GENERAL, ARMY MATERIEL COMMAND
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General WILSON. Good morning, Mr. Chairman, and distinguished committee members.
Thank you for inviting me to address the status of the Army's depot maintenance program. We pray that our panel will be a little shorter than the GAO's panel.
I would like to have my full statement entered into the record and provide a brief summary at this time.
The mission of the Army Materiel Command is to research, develop, acquire, supply, and maintain equipment required to meet Army and selected joint service war fighting requirements. Our government and contractor employees are the best in the world and are dedicated to producing quality products for our servicemen and women. At the outset, let me state that the Army is fully committed to an organic depot maintenance capability.
Depot maintenance has seen significant changes in the last few years. The biggest impacts have resulted from the decisions of the last Base Realignment and Closure Commission. Our original proposal and the Army stationing strategy was to retain core maintenance depots to perform ground combat, communications electronics, and rotary wing aircraft maintenance missions. However, the BRAC now being implemented realigned two of the Army's five maintenance depots, and retained the three core maintenance depots.
The two realigned depots are Letterkenny Army Depot in Chambersburg, PA, and Red River Army Depot in Texarkana, TX. Letterkenny Army Depot's maintenance mission is tactical DOD missile maintenance except for missile guidance. Red River Army Depot's maintenance mission is the Bradley family of fighting vehicles, including the multiple launch rocket system. So as you can see, these missions are much more limited than in the past, and they represent our greatest challenge toward maintaining an economically efficient depot maintenance capability.
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Now, we must ensure our depots run efficiently and effectively while retaining viable capabilities needed to support America's military. To accomplish this, we have developed a depot strategy which will ensure we maintain the right capability. And I truly believe competitive balance is the key.
Naturally, our first and foremost goal is to maintain a viable Army depot maintenance system. This mission is critical because of our depot support predeployment, deployment, and reconstitution of the weapons systems and equipment used by the Army.
The next major tenet of our strategy is to correctly workload the Army maintenance depots. In order to retain the capability to perform essential maintenance, the depots must be given adequate work consisting of depot maintenance of major items, and depot level maintenance of reparable components in support of our force modernization strategy.
In choosing and prioritizing maintenance requirements to be accomplished, we include in our decision making process the assurance that we are complying with all existing statutes for performance of depot maintenance, particularly core logistics, 60/40, and the $3 million statute.
One of my foremost concerns is the people component of this equation. Our depots have thousands of employees who have dedicated their careers to our Army and this great Nation. And I'm proud of each and every one of them, because they are our unsung heroes in supporting our soldiers. And I want to stress that people are our most important asset, and we must do everything possible to minimize the impact of our decisions on their lives. So reshaping our work force now consistent with funded workload to make our depots more competitive to be the best value choice for work in the future.
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We currently have ongoing initiatives to review our management processes that will identify necessary changes needed to increase our efficiency.
So in closing, let me state that the reshaping of the Army's depot system is not easy. However, the alternative would put the depots into a glide path of higher costs, fewer customers, and ever decreasing productivity, which jeopardizes our intent to maintain a viable depot system for the national defense of our great Nation.
By reshaping now, our depots can remain the efficient economical and productive source of vital support for the fighting forces that we have come to expect.
Thank you, sir. I welcome your questions.
[The prepared statement of General Wilson can be found in the appendix on page 1015.]
Mr. BATEMAN. Thank you, General Wilson.
Now, Vice Admiral Sterner.
STATEMENT OF VICE ADM. GEORGE R. STERNER, COMMANDER, NAVAL SEA SYSTEMS COMMAND
Admiral STERNER. Good morning, Mr. Chairman, Mr. Sisisky, and distinguished members of the Readiness Subcommittee.
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Thank you for this special opportunity to discuss our current status and capabilities in our depot facilities. I submitted a statement for the record, and would like to make a brief statement now.
Mr. BATEMAN. All your statements that are submitted for the record will be made a part of the record without objection.
Admiral STERNER. Thank you, sir.
Naval shipyards are a cornerstone of the fleet's materiel readiness. Through the BRAC process, we are bringing the size and the capacity of the naval shipyard establishment down in line with the needs of the operating fleet. We have moved from 8 naval shipyards with over 72,000 people in 1987 to 4 shipyards with about 21,000 people by the end of this fiscal year. It's awesome.
However, our people remain our top priority. We are working hard to lessen the harsh impact of downsizing on our employees. By aggressive outplacement programs and the offering of incentives, we have significantly reduced the number of people who were involuntarily separated. To footstomp that, fewer than one out of five employees in that huge downsizing left involuntarily. One of our outplacement centers received a national award for managing our people.
Looking ahead, we are intent on preserving and rejuvenating this essential work force in ensuring that our four remaining shipyards can operate viably and efficiently. In most cases, private shipyards are also substantially smaller. Some have not survived not only as result of our decreased maintenance requirement, but also the reduction in new construction opportunities.
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As we make Navy ships ready for sea, we continue to look for ways to do maintenance better in both the public and private shipyards. We are on a steady course to further align maintenance resources with maintenance requirements and to improve our planning and execution. We are squarely focused on improving our business processes, and reducing the total cost-of-life cycle of a ship.
We are also adopting commercial and Government best practices, seizing opportunities for new technology, implementing a regional maintenance strategy, expanding the application of condition-based versus time-based maintenance, pursuing engineering for reduced maintenance, and eliminating hours of cumbersome work practices.
Across the Board, we are improving our shipyard productivity, efficiency, and customer service, delivering ships to the fleet ready to meet operational requirements. For the second consecutive year, our naval shipyards have achieved a positive net operating result on a revenue base of over $3 billion.
In summary, we have made significant progress in striking the right balance between our public capacity and our private shipyards and improving the way we do business. There is still more to be done to get the best dollar and the maximum return on every maintenance dollar, but that's what we do at NAVSEA, deliver timely cost-effective solutions to meet naval and joint forces requirements. Our shipyards are on a course to turn that vision into reality in the next century.
I sincerely appreciate the opportunity to appear before you today, and thank you for your continued support of our men and women in the naval forces. I'll be pleased to respond to questions, sir.
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[The prepared statement of Admiral Sterner can be found in the appendix on page 1024.]
Mr. BATEMAN. Thank you, Admiral Sterner.
And now, Admiral Lockard, please.
STATEMENT OF VICE ADM. JOHN A. LOCKARD, COMMANDER, NAVAL AIR SYSTEMS COMMAND
Admiral LOCKARD. Good morning, Mr. Chairman, distinguished members of the Military Readiness Subcommittee. I'm Vice Admiral John Lockard, commander of the Naval Air Systems Command. I'm pleased to appear before you today to discuss the current status and capabilities of our naval aviation depots. I'd like to take this opportunity to make some brief remarks about naval aviation depots and submit my prepared statement for the record.
Several years ago, we recognized that our Nation's defense industrial base was being stressed, and any decision regarding our depots must consider both the public and private sectors. The Navy took a strong positive action and developed an industrial strategy which consisted of defining our core capabilities requirements, eliminating excess organic capacity by expeditiously closing the three naval aviation depots in accordance with BRAC, rightsizing the remaining depots to perform core related work, and using the private sector for noncore work where it made good business sense. By following this strategy, we have had a significant positive impact on the efficiency and effectiveness of the three remaining naval aviation depots.
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Directly following the BRAC '93 decision to close three naval aviation depots and realign mission work loads, we developed a plan to expeditiously implement the actions required by BRAC law. We successfully completed closing those depots, and in the process transitioned eight models of our air frames, three engine product lines, and more than 32,000 components to the remaining aviation depots, other service depots, or the private sector.
In addition, we've established the proper balance in workload between the public and private sectors. This year, our workload balance is 63 percent in the service depots, and 37 percents in the private sector. And we expect to remain fully compliant with the public-private share ratio in 1998.
Our industrial strategy has also allowed us to increase the capacity utilization of our depots to a point that we expect to operate on an average of 94-percent capacity for single shift operations this year. In addition to working on the proper public-private balance, we continue to work with the Army and Air Force to consolidate depot maintenance for common weapons systems through interservicing.
In 1991—excuse me, from 1991 to present, we've more than doubled our level of interservicing activity from 6 to 13 percent. Over the last couple of years, we've also concentrated on improving efficiency. Our overhead cost trends show a total reduction of 44 percent over the last 4 years with a ratio of overhead to total cost dropping from 40 percent to 34 percent. At the heart of our industrial strategy is a sizing our depots to perform core related work. The ability to identify core capability requirements with confidence has given us a tool to effectively balance our depot workload and stabilize the depot work force.
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Rightsizing our depots to perform core capability related work is the key to keeping our depots a strong and viable readiness enhancement force which supports our fleet so well. We've worked very closely with the operational and logistics organizations to ensure that the proper amount of workload is being performed in our organic depots. Because of our close involvement, I have the utmost confidence in our determination of core capability requirements. Performance of this core related work ensures that the depot artisans have the skills, facilities, and support equipment necessary to ensure that support for our war fighting capability is maintained.
Continued improvements in the workload production are being implemented in the face of challenging maintenance environments, and the naval aviation depots are a accomplishing a broader spectrum of repair and modifications for an aging aircraft fleet. Despite these challenges, the depots continue to provide the best value as the source of repair for the majority of our Navy owned reparables.
In summary, the naval aviation depots are critical and an inseparable link that ensures fleet readiness by providing a ready and controlled source of depot level maintenance and repair. They enable the Navy to sustain safe operations, and allow us to maintain aviation systems affordably throughout their entire life cycle. Our strategy has and will continue to focus on fleet requirements. We must continue to accomplish this in the most effective manner that maintains our war fighting capability. Both the public and the private sectors will be used in a complementary manner to achieve these objectives.
Thank you, Mr. Chairman. I would be pleased to answer any questions.
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[The prepared statement of Admiral Lockard can be found in the appendix on page 1033.]
Mr. BATEMAN. Thank you, Admiral Lockard.
General Viccellio.
STATEMENT OF GEN. HENRY VICCELLIO, JR., COMMANDER, AIRFORCE MATERIEL COMMAND
General VICCELLIO. Thank you, Mr. Chairman, and distinguished members of the Readiness Subcommittee. It's a pleasure to be here this morning. And first, let me say that we appreciate the continuing support of this subcommittee for our mission, and for the initiatives that bolster our fielded forces readiness, and your care for the people that are working hard to sustain our capabilities out in the field.
The subject of evaluating the disposition of selected portions of our depot maintenance activity and our structure through public-private competition is both important and timely. It's important in the sense that our Nation's commercial sector has traditionally played and today continues to play an important and productive role in our depot business. It's timely in that a dramatically changed world situation is driving corresponding changes in both our force's sustainment needs and the manner in which we might best meet those needs.
Today's Air Force depot structure, and our logistic support philosophy were forged by the experiences of World War II, and shaped through more than four decades of cold war challenges. We faced the imperative of sustaining a large Air Force deployed worldwide against a formidable foe and potential conflict that was envisioned to occur on a global scale and be of a protracted nature. We established a robust organic depot infrastructure that at one time included 11 air materiel installations sized to overcome time-consuming transportation and very uncertain logistics command and control systems by pushing, by producing and manufacturing, and repairing large amounts of supplies and equipment to our fielded forces. Faced with a perceived risk to our very national survival, we emphasized policies and were supported by legislation that ensured substantial organic logistics production capacities.
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The fall of communism and the ensuing decline of the Soviet Union presents our Nation with a fundamentally altered set of national security imperatives. For the foreseeable future, will face the possibility of regional conflicts, perhaps not unlike Desert Storm, as well as the operations other than war that have captured so many headlines over the past 5 years. Our success in recent contingencies has illustrated, among other things, the potential for technology to transform logistics needs through dramatic improvement in the reliability of our weapon systems and the impacts of intransit asset visibility in a focused responsive transportation system.
As we look to the future, several observations are worth mentioning. First, day-to-day readiness or preconflict logistics support has replaced mass sustainment or support during the conflict as the predominant contribution and principal focus of our logistics activity. Second, the government owned and operated infrastructure that supports this activity is excessive and needs reduction, an initiative that's given direction and timing by the 1995 BRAC Commission, in our case, in the Air Force. Finally, the role and contribution of our Nation's commercial sector in this activity, already substantial by any measure, warrant renewed consideration.
It's the confluence of all these trends and factors that makes reconsideration of the organic contract mix in our depots through the public-private competition process the right step for our Air Force. An important point to add is this would be the case BRAC or no BRAC, closure or no closure. This process, fueled by pressures of the competitive marketplace, will allow us to explore the capabilities, costs, and the savings or cost avoidances associated with alternative approaches to our activities, and may offer important commandwide advantages while helping to mitigate the costs of our depot closures. All this makes competition something we want to pursue. We intend to do so with due caution and a consideration of all applicable statutes and policies.
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Mr. Chairman, there are very many strongly held opinions that play on the issues we'll discuss today. There are those who would propose wholesale consolidation of our depot workload into nonclosing organic facilities without careful consideration of the costs and cost avoidances concerned, or without any attempt to explore the potential that a competitive marketplace might offer. I feel this is shortsighted. In contrast, there are those who advocate wholesale privatization of our Air Force depot infrastructure without regard to the cost and capability factors. I don't subscribe to this view, either. There are those who feel that additional involvement by the commercial sector in our defense depot activity puts America's security at risk. I don't necessarily agree. There are even those who feel that any increased participation by our Nation's businesses would lead to the eventual dismantlement of our organic logistics intrastructure. Not only do I disagree, but I feel that innovative partnering arrangements with industry could well prove to be a principal tool, not just to share the cost of sustainment, but to grow the size and increase the tempo, and improve the efficiency of our nonclosing installations.
Mr. Chairman, and members of the subcommittee, the concept of exploring the options for disposition, selected portions of our Air Force logistics activity through the process of public-private competition, is not some misguided venture. In our view, it offers distinct opportunities and potential advantages which we're exploring with due caution, and which I look forward to discussing with you. And I know that I speak for my colleagues here when I thank you each once again for your continued support of our men and women in uniform and out of uniform.
Thank you, Mr. Chairman.
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Mr. BATEMAN. Thank you, General Viccellio.
And now, General Stewart.
STATEMENT OF MAJ. GEN. JOSEPH D. STEWART DEPUTY CHIEF OF STAFF FOR INSTALLATIONS MANAGEMENT, U.S. MARINE CORPS
General STEWART. Mr. Chairman, members of the committee, I appreciate the opportunity to appear before you today, and would certainly thank you on behalf of all marines throughout the world for your continued support of the Marine Corps.
Depot maintenance in the Marine Corps consumes a rather small part of the DOD depot maintenance budget. In fact, when you do all the math, it turns out that about one penny we spend—that we spend about one penny out of every dollar that DOD devotes to depot maintenance. Nevertheless, depot maintenance in the Marine Corps is very important to us. It's important to our readiness. It is important to our expeditionary capabilities, and it's certainly important to our war fighting capabilities. And as our equipment continues to get older and older, the importance of depot maintenance in the Marine Corps continues to grow.
We are very proud of our two multicommodity depot operations. We have one in Albany, GA, that pretty well supports the east coast Marine Corps units; and then we have one in Barstow, CA, which supports the west. And we have linked both of these depot operations directly to our fleet Marine force commanders. In fact, almost everything that rolls off the line at both of those two depots goes directly to an operational commander, or it goes aboard one of our 13 maritime preposition ships through our operation in Jacksonville, FL, the place that we call Blount Island.
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We also have 1,900 marines and civilian marines who operate these two depots. We are very proud of them. We think that they do great work. They are very patriotic, and they give us great value. We do not do a great deal of contracting out, but we do support outsourcing and privatization of things as a complement to our organic depot maintenance capabilities. And we do contract out from time to time with caution when we're convinced that we can do so without jeopardizing the war fighting competencies that we think are so important to allow us to continue to be a 911 force for the Nation.
Price is very important to us. Even though we don't spend a great deal of money, we're always trying to save money for the taxpayer and for the Nation. At the same time, I would say that we don't ever want to sacrifice our capability to be able to change priorities to change schedules, and to meet the ever-changing requirements of the operational commander. Therefore, in our view, price cannot always be the most important factor. In summary, sir, I would say that depot maintenance in the Marine Corps is small. We're convinced that it's cost effective. And it also is a very important part of winning battles.
Thank you, sir. I would be happy to take your questions.
Mr. BATEMAN. Thank you, General Stewart.
[The prepared statement of General Stewart can be found in the appendix on page 1038.]
Mr. BATEMAN. Just to give you a heads up, in listening to the testimony concerning the difficulty of outsourcing and privatization with competition based upon the unavailability of technical data, I'm going to be asking whether or not we need an evaluation of the terms of our R&D and procurement contracts in order to better protect the capability of the Government to have meaningful competition in the future with the weapon systems and equipment that comes into the inventory.
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The question that I'll ask you to respond to, if any of you have any views on this, is constantly we're told that there is an excess capacity in the depots. It would seem obvious to me that excess capacity is not of itself a good thing. It's generally speaking a bad thing. But would the total absence of any excess capacity in the context of a surge capability be important, or do we want zero excess capacity?
General WILSON. Sir, if I may, I think that we probably need to maintain an excess capacity to, in fact, handle the surge that will occur.
Mr. BATEMAN. Anyone else have a view as to whether or not we need to, as a matter of policy, maintain some excess capacity?
Admiral STERNER. Yes, sir, I'd like to comment. I think we need to keep some excess capacity, particularly in those, what I'll call national treasures like dry docks, repair pier space, a place where I could take a ship and do some heavy lifting and damage repair. Through the core calculation or even peacetime operations, we're not going to use all that we have left in four shipyards, or combine it with the private sector. But ships have a way of going bump in the night. Things happen. They are very safe, but they weren't made to be safe, as Admiral Hopper used to say. They are meant to go in harm's way, and we need to protect some of those assets for the future.
Admiral LOCKARD. From the Naval Aviation Depot's standpoint, I believe there is a need for some extra capacity. Our loading of a little over 90 percent on single shift operations really lets us stabilize our work force in peacetime, yet it provides us, because we've relied only on single shift, to surge, to double the capacity almost if we really need to in time of war by surging the work force.
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What's important, I believe, in any capacity calculation is that we have an ability to stabilize our work force over time so that the artisans are not put through a continuous surge and downsize to adjust. And as you're well aware, sir, most of our activities are industrially funded type activities where we must run them to the best business practices; and, therefore, we don't want to have extra work force around in our facility. And if we're not careful and don't stabilize it, then we won't have this predictable stable system for the artisans.
General VICCELLIO. Sir, a couple of perspectives. First from the policy perspective, we calculate capacity based on criteria that are provided by OSD policy, and it's specifically a 40-hour single shift kind of operation.
I think that's good, because it does provide for short-term excess capacity, simply taking a work force that is defined that way at whatever capacity you might have. Moving from a 40-hour work to let's say a contingency operation 6 or 7 days at 12-hour shifts, you can make a substantial improvement in your capacity with existing equipment, existing supplies, existing personnel, and that sort of stuff.
A personal observation on a broader scale, as we go through this post cold war—well, our chief has called it a demobilization, if you will; it's usually referred to as a drawdown, we're all interested in divesting ourselves of unneeded infrastructure. I think it's important that we look at our depots in all the services from the perspective also that this will be the infrastructure that someday might be the key to a remobilization. Now, I'll be glad to say that I agree with those who say for a decade, maybe two, we're going to be faced with a national security threat that's very different from the cold war. But someday out there, because it has always happened, there will reemerge a threat to our Nation's security. And I hope we can hang on to, as you put it, excess capacity, if you want to call it that, through this period so that we will have the infrastructure we need to remobilize, should that ever occur. I hope it doesn't.
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General STEWART. Mr. Chairman, we don't have any excess capacity in the Marine Corps. But I think it probably makes sense to have some. Although I would second what General Viccellio says, the capacity formula that we use is based on a single shift, 40 hours a week. So I think without a whole lot of excess capacity, there is a capability to surge and do an awful lot of extra workload even if we were at full capacity.
Mr. BATEMAN. Mr. Sisisky.
Mr. SISISKY. Thank you, Mr. Chairman. Welcome to all of you.
I would have a host of questions for you, General Viccellio, but I've got a funny feeling that the people down the line may ask you some questions. So I'll ask General—but first, Admiral Sterner, I don't think you had anything to do with Louisville. You heard my comments, and I wasn't directing them at you. And I have a slew of questions that I'm not going to ask you. I may send some of them to you to be written, because they may be a little embarrassing to you, and I don't want to do that. But you heard me talk about Louisville. If you have any comments that you want to make now, fine. If not, I do have some questions.
Admiral STERNER. On the subject of Louisville, Mr. Sisisky, I think I'll pass.
Mr. SISISKY. I understand.
Admiral STERNER. We just got the draft GAO report last week. I don't understand all of their assumptions. We did do a lot of work with cost numbers, certainly at my level before that went forward. We're at 60 plus. GAO is at 72 minus. Somewhere in the middle may be truth. We're going to go work on that.
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Mr. SISISKY. But you know, I've been trying to get things in that shipyard that we're talking about, basically to reduce the overhead. And I don't think you disagree with that.
Admiral STERNER. No. No, I mean, it's almost a universal law; facilities, the more you can get in there, the cheaper per unit. But one of the things on the other side of it, the calculation for what happens to existing work overhead rates with the additional work from Louisville, true, is not, at least in the analysis I've seen.
On the other hand, the additional costs for overhead, more power, more lights, more services, and so forth, for the work force that would come in there, and sustain training and so forth, was not in the analysis as well.
So——
Mr. SISISKY. What was in the analysis——
Admiral STERNER. Somewhere in there.
Mr. SISISKY. Right. You know, we're dealing with—I said I wasn't going to get into it—we're dealing with two million square feet versus 400,000 square feet, and somewhere along the line, somebody's got to pay for that excess load. So I guess you can balance it out.
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But, you know, let me just tell you, because everyone of you just about spoke about people, and people concerns. You know, it's not strange, the first question I asked the new Secretary of Defense right in this room, we were talking about morale of uniform people and how this is going along with our readiness, and I asked him a question, How about our civilian employees.
I think, I may be wrong, but the uncertainty in the marketplace, and this word ''privatization'' just seems to scare the living daylights out of them, and I don't blame them. Obviously, the thing about job security is not there anymore. We downsize. I mean, you know, I could explain to people we were supposed to have a 600-ship Navy, and all of a sudden, we're going to be lucky, by the way, in 10 years to have a 200-ship Navy by the way we're building the ships now. But I do worry about our civilian work force, and I just wonder sometimes what the impact on the retention and performance, how this affects them. And I think we have to keep that in mind; and I'm just delighted that all of you talked about civilian personnel, because it certainly is an important ingredient in the overall defense of this country.
But basically when I was talking about Louisville, it has to do—and I gave you the three criteria that the Department of Defense talks about. What is the evidence that savings at the planned levels have been realized at any of the installations where privatization has taken place? Have you made an analysis? Any of you made an analysis of that?
Admiral STERNER. Well, sir, we are in the beginning stages of analysis. The crux of the issue at Louisville today, I think centers on two pieces. One, the work force was distracted—going back to your previous comment about morale, and the feeling of well-being at Louisville. I've never been on a closure list, but I've had a dad, and a father-in-law who basically got to retirement age and were sent home a year early so they didn't have to—and I know what that did to both families. That was a tactic several years ago.
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So I can only envision what went through the minds of the families of those people in Louisville. We were not very productive in Louisville. It turns out when we got down the road so to speak in a year, we had done about 50 to 60 percent of the work and spent about 80 percent of the money. That's just now coming to light as we look at the orders that aren't coming out. So that's one factor, our lack of efficiency.
The second piece is the work cycle to get something through the Louisville complex varies from eight to nine months out to fifteen months. That is, from induction to put it back on the truck for the customer.
And so here we are in the sixth, seventh month point, of contractor operation. It's really hard to see what the figures are telling us. So those two compound each other.
What I am hearing, and it's all anecdotal at this stage is that United Defense, Limited Partnership, believes their productivity is coming up; they believe that their productivity on a per-shift basis in what they see happening is improving. They seem to be optimistic that they are going to take the overhead down.
Hughes believes that they have a better understanding even than UDLP has; that is, United Defense Limited Partnership.
And I guess the other thing that stands out is that we are doing with about 500 contractor employees what we were using about 700 to 730 Government employees at this time last year. So it's all anecdotal at this stage, sir.
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Mr. SISISKY. You know, it's interesting, somewhere either in the RFP or somewhere I noticed that you must pay employees less when you privatize in place. I've got it somewhere back in the office that I could show, but it's interesting to learn; AFGE was in here, guess what they are doing? They are unionizing all of these private employees. So the cost data that somebody would plan to do, you know, wouldn't have—they were just in here last week, I think, testifying to that—so it's going to be very hard once they unionize to judge what the real costs are going to be.
What I want to ask all of you, and I will submit some questions. What assurance, or assurances, can you provide to this subcommittee that privatization activities will be implemented in accordance with the letter of the law. That's my big problem, and that's the question I ask you.
General WILSON. Sir, I would lead off by saying from the Army's standpoint, even though there are many proposals being considered throughout the Army, it is still our intent, that it is we make the decision in fact, we have an analysis that we can stand by, and the decisions we make will be best value for the service and for the nation.
Now, we've still got some work to do in that process, but that's the track we are currently on. And even in one of the proposals that's been brought to me personally, for example, is where an original equipment manufacturer has said to me, ''I can upgrade this system for 44,000.'' The number I have out of my depot is 66,000.
So I've sent my analyst back to the depot to check my numbers to ensure that our numbers are correct. So I would just tell you from our standpoint, we think we need to have the flexibility for a competitive balance, and I can assure you that those issues that are under my purview, in fact, will be able to stand the test and the scrutiny of Dave Warren and the people he has on his GAO team.
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Mr. SISISKY. Anybody else?
Admiral STERNER. Yes, sir. I believe we did proceed in the criteria of the existing statutes as we went through the Louisville thing. Now, I may be proved wrong, but one of the things that has come to light is that the actions were not consistent with U.S.C. 2469 with respect to the $3 million threshold. And our research indicated that from the history records of the conference agreement, the 2469, and I quote, should not affect the orderly transfer of workload as a result of base closure decisions.
Now, I don't know when that would be adjudicated under a court, how we would look, but that was the premise that we used. The decision had been made to privatize, and therefore with this language, which I think from the 103d Congress, that we could proceed without being in violation of 2469. I scrutinize those things personally with the counsel. I do not try to wing it. I don't want anyone any member of the subcommittee to wing it on these things. We have to stay within the statute, first; and we should try to make the best business case to get the best return for the taxpayer is the second piece.
Mr. SISISKY. You have a very innovative general counsel. They wrote to Mr. Bateman and me about this, and I thought it was very innovative. We showed it to our lawyers. He couldn't believe it. They just——
Mr. BATEMAN. Well, in the interest of time, do the others have a response to that question? Because we've got to move on.
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General VICCELLIO. Sir, in our command, we're faced with two challenges or opportunities, depending on your point of view, I guess. One of them is the depot business, and one of them is our base operating support, not just at depots, but at our test centers and our acquisition centers as well.
Of the latter first, we're being very careful as we proceed to look at various actions that could be contracted out to proceed in accordance with the A76 process, which is a bit cumbersome; but nonetheless, that's our guidance, and that's the process we use.
In the depot business, as we discussed last year in this hearing, there's a myriad of guidance and statute, 2461, 62, 64, 66, 69, 71, in one case, some language in certain appropriation bills, and we're being very cautious to make sure that we proceed in accordance with all those statutes as we proceed toward public-private competition.
Mr. BATEMAN. General Stewart, if you——
General STEWART. I would just say, sir, we always obey the law.
Mr. BATEMAN. With that, we'll turn to Mr. Jones.
Mr. JONES. Mr. Chairman, thank you very much. I apologize for my voice. I've obviously got a bad cold.
General Stewart, I'd like very much to thank you for your comments. I have the privilege to represent the third district of North Carolina, the home of Cherry Point, and the NADEP at Cherry Point. I think they do an outstanding job for the taxpayers of America.
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My question actually is for Admiral Lockard. In your testimony, you state organic and commercial capabilities will be maintained, and you state that the NADEP's are currently sized to core and operate in a stable environment.
I must tell you that in my district at Depot Cherry Point, all available official direction states otherwise. Even more clear is the fact that the depots are not stabilized because the future workload is not known.
The future for new weapon systems is very unclear. For example, and this would be my question to you, what is the intention with the V–22? And the second part of that question, is it core workload?
Admiral LOCKARD. Mr. Jones, I'd be happy to respond to that. I certainly want to make sure that the work force understands very clearly that we have stabilized there. On the V–22, it will be put into our standard core calculation methodology. Everything associated with the V–22 that requires a core capability will be calculated into the organic side of the equation. There will be aspects of V–22 that are not core, that are—where the capability itself already resides in the service through another product line.
As we go through that methodology, we will break out the amount of work that we would consider to be core, and that will go into one of our existing organic depots, more than likely, into Cherry Point, since that's our vertical aircraft depot of primary responsibility.
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Mr. JONES. Admiral, because I'm new on the committee, and I must ask the second part of the question, I realize that you're saying part of the work will be defined as core, and other parts possibly will not be or maybe probably will not be defined as core, so I want to ask the second part of the question.
The V–22 will be the Marine Corps' major troop transport. I cannot believe that it will not all be core. This is a huge long-term issue of readiness as General Stewart was talking about the importance of readiness. I have great concern with the way personnel issues are being managed.
Admiral, as you said in your testimony, the NADEP's are right sized now. Then why is there a plan to further downsize and reduce the number of personnel from now until the year 2000.
Admiral LOCKARD. Mr. Jones, I'd be happy to respond to that. Right now, we're at about 12,000 direct man-years of activity associated in all of our depots. What we're doing is looking at our core capability in the future, and sizing our throughput capacity and work force to be able to respond to what we believe that core capability will be.
Between now and the year 2000, we see ourselves fairly stable. That will obviously depend on the future year funding that's appropriated for this purpose. But in looking ahead today, I see us somewhere between 12,000 and possibly as low as 10,000, but easily staying at 12,000, depending on the resources made available for depot maintenance and core capability determination.
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I feel very comfortable that we have reached a level of stability in the naval aviation depots after our consolidation. It's obviously been a very disruptive period as we've closed three depots. That's been traumatic not only to the closing depots, but to those remaining open as they absorb this extra work.
I believe that the work force will become more efficient over time. Cherry Point, in particular, has a history of being the leading depot for continuous improvement, and has won numerous awards and recognition for being a work force that the Navy and Marine Corps are very proud of. I'm sure they will do the same in the future.
Mr. JONES. Thank you very much, Admiral. Thank you, Mr. Chairman.
Mr. BATEMAN. Mr. Ortiz.
Mr. ORTIZ. Thank you, Mr. Chairman, and I would like to welcome the second panel this morning.
I would like to ask a few questions, Mr. Chairman, and then I know that I won't have time for the others, but I would like to have them for the record, if I may.
This question is for General Wilson, and I consider General Wilson a great general, a great soldier, and a good friend. But General, there's things that I cannot seem to understand, and really just—they don't make sense at all.
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Let me ask this question. In light of the Army's 1995 BRAC recommendation to close outright two maintenance depots, how can the Army afford five depots and how long can the Army continue to operate depots without putting the future of all these depots in jeopardy?
Why does the Army continue to use scarce resources to prop up its two realigned depots by privatizing workload when the resources could be used to make the three remaining depots more efficient? This is something that I can't understand. I mean, maybe you can enlighten me, General.
General WILSON. Mr. Ortiz, sir, as you know, it was the BRAC decision to realign the two depots. And I agree with you, we share your concern. But we have to comply with the law. And you're absolutely correct in terms of the strain of keeping those two realigned depots will cause on us in terms of the resources that are available. And let me give you an example.
As we go about over the next 24 months complying with the BRAC language at one of the depots, we will relocate that workload to another depot which will cause me to take the current work force of about 2,100 people, and in two years bring that down to 1,100 or 1,200. Because that activity will not have the funded workload to support the on board strength at that entity today.
So we're wrestling with all of those issues, and I would certainly appreciate any help that we could get from this body. But again, we are operating within the scope of the law.
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Mr. ORTIZ. But you know, what I cannot understand when you say that—in your written statement that Corpus Christi Army Depot has more total people on board than their funded workload supports.
Then, please explain the presence and use of contractor field teams right next door. I mean, you know, we don't have the workload, but yes, we have been able to contract to somebody else right next door. And what's going to happen when we downsize like is expected when you're going to have to let go of at least 800 soldiers—I mean, civilian workers at that base. What's going to happen to the contract workers? Are they going to stay?
General WILSON. Sir, the contract field team people that we currently have on board who are down there supplementing the work force, my report indicates that 80 percent of them who are on various projects will be gone by the end of this fiscal year.
There are some people in some other areas that I understand will continue for a period of time. So as we go about looking at the workload, those folks who have been contracted in fact are on a project, and will leave at some period of time.
Mr. ORTIZ. See, but again, you say that's supplementing the workload, but 800 employees before this next batch were let go because there wasn't a workload. But there is a workload for contractor workers. This is something that doesn't make sense at all.
General WILSON. Sir, as we have discussed, if you'll permit me, those are target planning numbers as we have talked about, about 336 possibly for 1998, and about 472 possibly for 1999. Keeping in mind, sir, that at this point in time, I do not have, of course, the 1998 budget, and we've talked about that. So as those numbers are finalized for sure, the numbers will be modified to accommodate the funded workload that will be made available.
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Now, as I indicated in my statement, there still has to be some reshaping that has to occur within the depot complex. There are some management processes that are ongoing throughout the entire depot complex; because at the end of the day, we have to make sure that we have the most efficient entity, and, in fact, will compete very well with the corporate sector.
Mr. ORTIZ. But, you know, as I go back, and I want to be very brief, as we look at the——
Mr. BATEMAN. All of us are going to have to be very brief.
Mr. ORTIZ. Yes, sir. At the track record, contractor workers have cost more money than civil servant workers, and I know that I would like to include those—the rest of those questions for the record because my time has run out.
Thank you.
General WILSON. Thank you, sir.
Mr. BATEMAN. Thank you, Mr. Ortiz, and for the members, let me suggest that we lose our jurisdiction over this room at 1 o'clock. We have a third panel that hasn't even gotten on yet. So I'm going to ask the committee if they would consider filing whatever questions they have for the record. And at the most, ask that they confine their questions at the hearing today to one question, and then any further questions submit for the record, or you can submit them all for the record.
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And with that, Mrs. Fowler.
Mrs. FOWLER. Well, Mr. Chairman, with all due respect, this is such an important hearing, if we don't finish at 1, I would suggest that we continue it at another date, because I think we all have questions that we need to get on the record. We need to get these answers out in the public, and I for one want to keep it moving, but we need to get this all out there.
And in that regard, I have a lot of questions for General Viccellio, but I'm gong to depend on my ALC friends to ask those, and I might followup with some on the record, and I'll stick within my limited timeframe with the Navy.
Admiral Lockard, I want to tell you first that at least on the aviation side, which is the side I follow more closely, I believe that the Navy has done a much better job than its sister services in order to downsize. The consolidation that you undertook in 1993, which you mention in your testimony, was very painful, going from six depots to three. But they paid big dividends.
And I also want to commend General Stewart and the Marines, because they really aggressively support organic maintenance.
Having said that, and while there are a couple of aspects of the Navy's policies and practices that remain troubling to me, as I understand the Navy's approach to core, the contracting out of JCS scenario platforms—these are mission essential systems—on a sole source basis is considered a high risk and inconsistent with your Navy policy.
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So in that light, I was really troubled by GAO's testimony that of 12,773 Navy nonship depot maintenance contracts that it had reviewed from fiscal 1996 to date, some 12,622 were let on a sole source basis, for a total value of $638 million.
Now, if my math is right, that's about 99 percent of those contracts.
Could you comment on that?
Admiral LOCKARD. Mrs. Fowler, first of all, I'd like to thank you for your support of the NADEP at Jacksonville. We very much appreciate that. I was just down there yesterday and very pleased to see the progress on the consolidation that's going on at Jacksonville.
I would be happy to comment on the sole source activity. I think most of those contracts, while I don't have the details, just on a summary level, I would think that they have to do with component repair that's done where we've gone back to an original manufacturer in most likely cases, which is the sole source of repair for those particular items.
I can assure you that we do not put anything into the private sector that we would consider to be core capability. Often when we talk about core, we do not understand totally that we're talking capability instead of product, and sometimes I know even I get that confused.
The real important thing I think in core determination is that we're talking about the artisan capability and the facilities they work in to be able to provide us a long-term readiness capability.
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Just as we put a very large amount of activity in the private sector—and I will review those numbers—we also put an awful lot into our depot's sole source. That's because they really do provide us the best value.
I think you recall in my statement I talked about it is the preferred source, our depots are the preferred source, for the very large majority of our component repair in the Navy.
Mrs. FOWLER. Well, I would appreciate getting that for the record, because when I started doing the math, I mean, it's hard to see that 99 percent of other 12,000 contracts over just a 2-year period, were all, you know, needed to be sole sourced. And so if you could look into—and none of them were core. So I would appreciate getting some information on that for the record.
And then just one other question, in light of your core policy, What would be the implications if your sister services started outsourcing workload and capabilities that are associated with your organic core capabilities?
Now, for example, What would your reaction be if the Army discontinued organic maintenance of H–60 helicopters, or the Air Force discontinued organic maintenance of the F–110 jet engine?
Admiral LOCKARD. Again, Mrs. Fowler, I think that's right at the heart of this core issue, and I'd be pleased to respond to that.
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Obviously—let me just say at the outset that in my experience, in working in the depot arena, we have never worked better as a team at getting at definition of core than we have over the past couple of years.
In the case of the Army, General Wilson and I very much engage in determination of core together. As I said in my statement, we are very aggressive at interservicing. We are putting organic core capability into both the Army facilities and the Air Force facilities.
That means in most cases, we are not maintaining it in our own depot. What we have agreed to is that we will make an assessment, should either of the other services decide that they are going to privatize or move workload associated with Navy work, that we will do a full core determination using the core methodology of that workload.
If it's determined that it truly is core—and that changes over time as we do risk factors, as we change our product lines and services and move older equipment out, and newer equipment in, the core determination changes; and hence we do revisit it from time to time—but should either of the other services choose to move Navy work, then we would do a core determination, and we would have to concur in that.
If they must get it out of the facility, then we would work either in our own facilities to refacilitize for that core work, or go to another service to get the core work, should it reside there.
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I know I've been working with General Viccellio in some of his activity where we're going to provide a core capability for some of his work as he moves it out of some of his depots.
Mrs. FOWLER. Thank you, Admiral. I appreciate it.
Thank you, Mr. Chairman.
Mr. BATEMAN. Mr. Pickett.
Mr. PICKETT. Thank you, Mr. Chairman. I'm going to, if I may, just ask my questions right now for the record. It will take a moment, and then I'll ask Admiral Sterner if he would to kindly answer the questions as fully as possible by writing for the record.
On the issue of the 60/40 requirement presently existing, occasionally, when you have a large ship like an aircraft carrier requiring extensive repairs, it can be fairly disruptive of trying the maintain that 60/40 ratio within a 12-month or 1-year period.
I'd like to know if that is a problem for you, and what kind of recommendation you would like to see to relieve you of that problem that may cause you to do uneconomic things to accommodate the 60/40 requirement.
I'd like to know—that's the question No. 1.
No. 2 is the master ship repair agreement issue is one that we've chatted about before. I know that you have had this under consideration for sometime, and I'd like for you to tell us where you are with that issue, and how you see that fitting into your depot maintenance program.
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The bundling of ship repair contracts, and the fact that in those cases, often the work is done on a cost plus basis, if you could respond and tell what's happening in that area and what the Navy's plans are about the bundling of ship repair contracts. Your smart ship program and regional maintenance, and how they are impacting on your depot maintenance requirements.
And then finally, what impact the defense business operating fund [DBOF] is still having on repair programs, and whether you are—the Navy, that is—being required to advance fund DBOF, and that you're paying for work in advance, and in some cases, you're paying for work that you don't really get, and I'd like to know what impact that's having on your depot maintenance program.
Admiral STERNER. That's all, sir?
Mr. PICKETT. That's all. Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. Pickett.
Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman. And gentleman, we appreciate you all being here today, and I particularly appreciate having the opportunity to visit with General Stewart. General, we miss you at Albany, and we are glad to have you up here, but there are a lot of times we wish you were back.
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I want to take just a minute to make one point very clear for the record based on Mr. Fazio's earlier comments. Mr. Fazio thinks that the Air Force privatization plan is way beyond privatization in place, and I cannot disagree any stronger on an issue than I do with that.
In the beginning, just after BRAC, there's no question but what the Air Force's position was purely privatization in place.
Now, under fire and recognizing that privatization in place is against law as has been pointed out in this committee room many, many, times, General, the Air Force trots out this new plan that is not in place. I understand the GAO has just testified that the plan, as written, seems to be competitive. But I'm here to tell you that it's not. I've reviewed the proposals sent out by the Air Force, and they simply do not allow for public versus private competition.
The truth is, and Mr. Brosnan recognized this, the truth is that the Air Force has gamed this issue by packaging Air Force workloads so that the only practical result is going to be that a private contractor performing the work in place at Sacramento and San Antonio is going to be able to get the bid. There's just no question about that.
General, I've listened with great interest to your comments with regard to saving the Pentagon more money through outsourcing. We've heard that over and over again, and I've listened most closely to your assertions as they relate to depot maintenance and their place in the DOD budget.
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Now, I would love to work together with you and any other Member of this body to advance reforms that will in fact save taxpayer money. That's what it's all about up here right now as we're in these times of budget crunch. That's why the Chairman has devoted valuable hearing time to this particular topic.
But General Viccellio, I must tell you that I refuse to sit here in this committee room and allow you to spread the idea to Members of Congress and our armed forces that there is in fact savings to be had in the area of widespread privatization of our military depot repair system. No Member has spent as much time as I have pouring over the information that you and the individual services have released to support your claims. And yet, I have found in every case that your claims are overblown and in some cases they are just misleading. And what troubles me the most is that you and others in the administration have refused to acknowledge—and let me just say that I understand, General, that you have to carry the water for the administration. I fully recognize that. But what troubles me is that you and others in the administration have refused to acknowledge even the numbers generated within your own organization that show that privatization of depot functions is more costly to the American taxpayer.
Now, I know that your response is probably going to be the same one that I have heard over the last couple of years, and that is that wrong assumptions were made in the GAO report is just plain wrong. Well, you heard what I asked Mr. Warren a second time in less than a week that I've asked that question to him. ''Mr. Warren, if your figures were wrong according to the Air Force, have they given you any other assumptions.''
And his statement was, ''No, I've never received any other assumption.'' It's been well over a year. So I think we've got to assume that there are no incorrect assumptions in the GAO report.
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Now, it's no secret to those of us that follow this issue; but for those that do not, let me repeat it. The GAO concluded that privatizing the maintenance workload at McClellen and Kelly Air Force bases would cost the Air Force $468 million. That is just totally unreasonable. Now, there's no explanation for the Air Force's own conclusion that the $468 million per year was not correct, it was actually, or will actually be, $689 million every single year.
Now, General, those are both—those figures are arrived at by using the Air Force's own figures, and there have been no changes in the assumptions given to anybody to change those figures.
That means that well over $3 billion of modernization money over 5 years is going to be wasted.
We have a precedent to believe that the GAO will be right on this issue, and that's Newark AGMC, an issue we have discussed, but the result of which cannot be understated. GAO predicted cost growth under the private sector, and now we are finding out that not only was the GAO right in their original estimate, but that they underestimated the actual cost.
The Air Force's plan to privatize work at Kelly and McClellen air logistic centers that come from a cost and policy standpoint—better left in the hands of the Pentagon is a waste of this committee's time, Mr. Chairman. Our time would be much better spent on real savings initiatives and figuring a way out of this fiscal mess this administration has created with its entirely inadequate budget request.
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In this budget atmosphere, General Viccellio, you do your service a great disservice. Because I fear Members of this body, and indeed the other body, may take exception to the Air Force's plan to waste nearly $700 million, and take the money out of other Air Force priorities. Given the Air Force's track record on this issue, I frankly don't blame them.
I'm concerned after the hearing we had the other day on TACAIR that we're not going to have enough money to buy F–22's, and joint strike fighter and FA–18 E and F's, and I think we need all of them. Nobody supports those programs more. If we would just do what the law requires, and close the bases that the BRAC dictated to be closed, we would probably have the money to be able to afford those units.
I just came out of a hearing in another building where we are trying to save $600 million within one department to meet the budgets. We can save $600 million with the stroke of a pen in doing what the law says we ought to do, and what the BRAC commission said we should do, and that's close those two bases.
Now, getting back to my question with respect to the competition, general, I'm a little bit emotional about this, in case you don't understand. Can you state for the record before this subcommittee, have you ever directed, or known of direction, to ensure that the depot work currently performed at Kelly and McClellen be gamed so as to ensure that the work be privatized or performed at the current location?
General VICCELLIO. No, sir.
Mr. CHAMBLISS. Thank you.
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General VICCELLIO. Could I——
Mr. BATEMAN. General, you're entitled to a response.
General VICCELLIO. Yes, sir; I wrote down three or four things I would like to respond to. Getting back to your opening comments about the GAO and their assumptions. Mr. Warren, this morning, that was the first time I had an opportunity to hear him describe the methodology and the assumptions used during the workload distribution analysis that you've referred to, his 468, et cetera. And they were exactly as I thought they were. And they are not the way this thing would happen if it came down. And here's what I'm getting at, and this is the same conversation we had during our most recent meeting.
There is no disagreement that when you add workload to a work force, there is the opportunity to share overhead which brings down the price of an individual unit of production to your customer, and you lower the cost.
But for the GAO to take all this workload that's coming out of Kelly and Sacramento, and put it into the remaining depots, and assume that there would be little or no overhead growth is totally erroneous.
I have people working for me that have worked these issues for a long time, and they said they cannot remember a single case when we have added workload to a location when the depots, and under the byline of their commander, came in and asked for more overhead. They need overhead to do the job.
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What we need to do is look at this, and we're doing it as part of our public bid preparation, commodity by commodity. For example, as we consider moving aircraft workload, let's say from Sacramento into Ogden, there's aircraft workload at Ogden today. There may be some facility costs, but you shouldn't have to add too much overhead to be able to handle the additional workload.
But in considering moving something like hydraulics into Ogden, you've got to take a different approach. While there are some skills in the landing gear shop that could lend themselves to a hydraulic operation, that is a totally new workload. And the overhead slice that would have to move with it from Sacramento is greater, and you've got to quantify that.
So no one disagrees that this phenomenon will happen. And I even agree that it will produce substantial savings. But to assume that it's all going to happen without any overhead growth I think is misguided. I mean, it just doesn't happen that way. And the same goes for the materiel, which is the other half of that.
With respect to Newark, you talked about the study. We just finished a study for the GAO on the missile workload at Newark. They've asked us also to do one on the aircraft related guidance systems at Newark, and that's underway now.
The outcome was that there's a range of possibilities that go from the contractor being slightly cheaper to the contractor being $20 million more, as Mr. Warren pointed out.
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The analysis went through getting from the possibility to the probability, and the midpoint is at this point in time after a much shorter production run than you have at Louisville, for example, the indication is that for the year 1997, if you make all the assumptions, it comes out to be $6.8 million more for the contractor. But let me point out that that's based on 3 months of post-transition contractor operation. Three months during which there's a thousand moving parts to this equation, and the contractor performance has steadily improved.
My point is, before we try to make too much hay out of this, let's give this guy a chance to perform. From a production point of view, and this is embarrassing for me to acknowledge, he's beating the pants off the way we used to do it organically. He's got 25 percent more production coming out. He's doing it 25 percent faster. And his failure rate once we put these things on the top of a missile, is better.
So how does that stack up with a nonrecurring cost? There's a lot more parts to this equation than this comparison very early in the process between what it used to cost us to fix missile guidance units on the organic side, and what it's costing us today with a contracted operation.
Mr. CHAMBLISS. General, I appreciate what you said, but now, let me tell you, if you had not heard that in the last year, then I'm not sure where you've been, but let me just say that in addition to GAO, your own Air Force command came up with numbers that show that GAO is some $200 million short on an annual basis for savings to the American taxpayer. But we'll continue this another day. Thank you.
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Mr. BATEMAN. Well, I think it would be helpful on this score if he had from the Air Force its analysis or its critique of the cost analysis the GAO has done. We ought to get it up front. They've made certain statements about which is or is not most cost effective. I want to hear the Air Force perspective on the points of agreement or disagreement with the methodology of their analysis, or the accuracy of their analysis. I think we need that from the Air Force.
General VICCELLIO. Sir, we're going through that analysis as a part of the bid preparation for the public bid of the workload at Sacramento. I mean—excuse me—when we are talking about the workload spread as we transition and consolidate, then that will get scrutiny as part of the source selection process. I want to make it as precise and to the lowest level of indenture that I can.
Now, I provided in a personal letter to the acting auditor general my personal observations about the GAO assumptions in this matter and what I think we need to do, which is what we're doing. Now, I've got to say something for the GAO, after all this effort on their part; they came up with recommendations that we totally agree with.
Maintain core. We're going to do that.
Make sure you use competitive processes as you look at disposition of this workload. We're going to do that.
Make sure you do this analysis on the effect of loading up the depots and consolidating workload on overhead rates. We're going to do that.
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And finally, look at accelerating some of the movement of this workload, particularly from Sacramento to Tobyhanna, and we've already done that, and it's been reviewed by the Defense Depot Maintenance Council and approved.
So the bottom line is the GAO had some solid recommendations with which we are agreeing, and as we proceed with public-private competition, we are accommodating all of them.
Mr. BATEMAN. The thing that is sort of a disconnect with me, and maybe it's because I don't properly understand it, is you speak in terms of privatization in place and the public-private competition. It seems to me that you ought to have all of the analysis done before you start with a preconceived notion that we are going to initiate that competition. That decision ought to follow the analysis, not go along apace.
General VICCELLIO. Let me respond to that. You know, there's an awful—as I said in my opening comments, there's an awful lot of powerful influences here and opinions about this matter. I probably speak somewhat for my colleagues here when I say that sometimes I feel like a salami in a sandwich.
I mean, we've got powerful interests that say, ''Go ye forth and privatize to the limit, $15 billion a year in savings. Forget the other concerns.'' And then we've got powerful interests that say, ''Let's consolidate everything into the remaining depots. Forget looking at what the energy of the competitive process can do for you.''
We're in a battle of, ''My analyst is C.F. Hutton, what does yourself say.'' That kind of thing. To me, you know, you all put out a statute that said, ''Do public-private competition when you're going to consider the disposition of workloads of a given size.'' And that's what we're about. Privatization in place is not a policy, it's a possible outcome. It's got costs. It's got advantages. Privatization at another location is a possible outcome. Consolidation into the remaining depots is a possible outcome.
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I guess I've talked to 500 people in the last year-and-a-half about this, and I have to say that Congressman Chambliss among those I've been talking to is in the minority. Most people feel like this thing is rigged so that the public depots can't lose.
I know the source selection authority personally, and she is the toughest decider on these things that I know in the Department of Defense. We are going to run a tough—she's going to run, I'm not a part of it, I'm a bidder—but she's going to run a tough source selection process that's fair and open. I think that's in the best interest.
I mean, the GAO, everybody agrees, that it's the force of competition that is our most likely candidate to really see what the right answer is. And I would ask the committee and the Congress to give us a chance to carry this process through and see what the result is. And we get away from this dueling analyst bit.
Mr. BATEMAN. Mr. Hansen.
Mr. HANSEN. Thank you, Mr. Chairman. I apologize for not being here sooner. We're trying to change the ethics of the House around a little bit, and I'm stuck on that committee. But I have tried to go over the statement of the distinguished panel here, and I appreciate the work that they've done, and I know they have a tough position.
To a certain extent, it reminds me when the current administration first went in and they wanted to change the homosexuals in the military around, we got a different opinion on a one-to-one than we did when they were in front of the committee. Because we know who they work for.
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On the other side of the coin, I want to compliment these people, and I look at—especially the Navy who was given the responsibility to close—had six depots, and they closed three, and from what I've read about the Navy, they've done a super job in keeping the capacity up.
And General Stewart for saying the Marines always obey the law. I don't think it's a question, really, of the things that have been discussed recently. It's a question of what the law is.
Now, I know you folks fulfill the law. The executive branch carries out the law. And in this particular instance, it's not a question of privatization, it's a question of obeying the law. And now, we've had the past secretary here, the current secretary here. We've had Mr. White here, and many others, and myself, and the Secretary—the chairman of the full committee has repeatedly asked the question to give us the interpretation of BRAC. Some of us that have been here an awfully long time helped write the BRAC law. And I think it's abundantly clear what it says.
One general said, ''Oh, we have the prerogative to privatize in place or to close.''
Uh-uh. It doesn't say that in there, and I'm still waiting for the Pentagon, who has not come through, to give me their legal opinion. I would like before I die to see that. Because I've only asked for it now for 4 years to see this legal opinion of where they can privatize in place.
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So let's go back to the law for a minute. And the law is abundantly clear. Now, laying that aside, let's get into this argument the gentleman from Georgia brought up where he talked about what you can and can't do on privatization in place.
The GAO, and they are not flawless, we all realize that, but they have worked on assumptions that they received from the Air Force.
They talked about Newark in detail. I can't understand why this question has come up, and I'm glad that General Viccellio—and I have great respect for General Viccellio, I know he's done some great work, an admirable and very enviable record that he's written as an Air Force officer—but the missiles for McClellen were supposed to be moved to Tobyhanna sometime ago, as I read what they said.
I've taken it upon myself to talk to almost every BRAC commissioner on what they intended to do. You know, I think really we're now trying to get over what they intended to do. But just let me, for my friend from Georgia, give you an example here that kind of really bothers me.
What I have in front of me is I think from the Air Force, and it's an Air Force integrated product team relocation study where the great detail, the Air Force—I'm talking the Air Force, not an outside force—these experts state over and over that relocation of the Stealth fighter program should begin to Ogden, which, general, you've talked about. That Ogden is the highest ranked location. Here it is right here if you want to read it.
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Three different groups went into this thing because of the very issue you've brought up, which is the issue of capacity. I also have an Air Force audit that supports that decision, and criticizes current Air Force plans to sole source this thing.
So laying all these guys in blue aside, what do they do? They decide to privatize it to Lockheed Martin. And then they also go on to say the Air Force—the Air Force says in their report that that decision will be very costly.
Now, why? I keep coming back to the law. General, I appreciate you and have great respect for you. But I can't understand when the Navy, the Air Force, the Army—excuse me, take the Air Force out of that—obeys the law, why you folks are so hard put to not follow what the BRAC law says. Do you want to respond, or would you just rather pass that off and let that one go?
General VICCELLIO. No, sir. You know, you wrote me a recent letter about the F–117, and I responded to that trying to tell you why we were considering an alternative decision. As you know——
Mr. HANSEN. Excuse me, sir, what letter? I got one from you on the F–16 on reserves. I don't recall the letter on the F–117.
General VICCELLIO. No, I answered your F–117 letter sometime ago. If you haven't received that, I'll—in fact, I think I have a copy down in the Air Force office. I'll leave it before I leave today.
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Mr. HANSEN. I would appreciate it.
General VICCELLIO. Yes, sir.
About 1995, right after I came to the command, I was out visiting some of our principal commercial producers, mostly looking at manufacturing. In other words, aircraft and other system acquisition, not necessarily depot work.
I was visiting Lockheed Martin where they do the modification on the F–117. At that time, they approached me and were talking about some modifications that they were discussing with our air combat command which flies the aircraft. Most of them having to do with operational capabilities of the airplane.
At that time they said, ''Would you entertain a proposal from us to take over the materiel management part of this aircraft, which means the warehousing, the supply, and that sort of stuff.'' Which has been done at Sacramento.
I said, ''Well, we'll entertain anything you want to suggest.''
But I said, and I was pretty blunt with them, ''I think anything that's going to be meaningful to us has to meet three criteria. First of all, it needs to be a total kind of approach like we have with our T–1 aircraft. In other words, we're not interested in piecemeal approach. If you are willing to sign up to responsibility for a certain out of commission rate for supply, for example, and give us a bid based on that simple performance parameter, we might consider it.''
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I said, ''Second of all is you have to sign up to a cost reduction curve. In other words, we've had some success in this business by outsourcing and competing some of the nonproprietary parts that are on that airplane, and you've got to promise contractually to continuing that curve. In other words, over each year, there's got to be a lower cost of ownership and operation, given a constant flying program. If you don't make it, it comes out of your pocket. Because we've had success, you've got to sign up to that contractual area or we're not interested.''
And finally, I said, ''We've had an awful lot of breakout success at Sacramento where we find people again for nonproprietary parts that are willing to enter a competition and either repair them or manufacture them for us, and you've got to continue that program as you take responsibility for this.''
So they say, ''Well, we need to take that under advisement,'' because that's pretty challenging, I guess. I mean, I would think it would be for them. They came back and wanted to talk about it with our ''SKO'' out in Sacramento. And so they've been doing that for sometime.
Now, the 117 program and the management of that program is not in my chain of command. That's one of the PEO programs that goes up to Mr. Money, our assistant secretary for AQ. But they are the ones that are talking to the contractor about what they are willing or not willing to sign up to.
Whether or not—and I tell you this in the letter I sent you—this justifies a sole source award or not is up to them, and it will depend on, among other things, a contractor's willingness to meet these criteria.
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I don't know what the outcome will be. But I promised you in the letter, and I still do, that Mrs. Julian, who will probably be either the signer of the JNA, or the decider yes or no on the approach, will come over and brief you before we make any contractual arrangements with Lockheed.
Mr. HANSEN. Let me just quickly, Mr. Chairman, if I could conclude, let me just say, general, I appreciate your response, and I appreciate you sending me the letter, and I apologize; I haven't seen it. I don't know where it is, and I want to get my hands on it and see it, and I would appreciate a copy. But it just seems to me that the Pentagon folks should be over here asking us to change the law, because they seem to be having a very difficult time living within the law they have. I don't know if they would be successful, but it seems to be the question.
But if they can't do that, which seems obvious also, they should change their philosophy as far as outsourcing and privatizing so many things, and I think someone ought to draw up what core really is. All you folks in uniform, I get as many decisions out of core as interpretations as you can out of beauty; it's to the eye of the beholder. And at that point, when we can get that determined, I think maybe then 60/40 is just going to fall away, and we don't have to worry about it. But while everybody is doing their own interpretation of it, I think it's going to be rather difficult.
And frankly, I think this administration is bent over on the idea of privatization. It sounds strange for some of us who are very business oriented people; I believe in privatization. I also believe in a strong military that can respond to things.
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And frankly, I say respectfully to you, all of you gentleman, I think you're in violation of the law. Not you, but the interpretation that's come out of it.
And last time, I talked to some of my good friends at the White House, and they all said, ''Before you get so uptight about this, Hansen, why don't you let us get this election over with. Maybe this will all fall through the cracks.''
Those cracks can be pretty narrow, because nothing has fallen through lately. I guess we're interested in other things. But because we can't seem to get a response out of the White House, Mr. Chairman, I think that many members of this committee and members of the full committee are pretty tough on the idea of coming up with—debate when we get to that point.
Thank you, Mr. Chairman. I do appreciate you giving me the opportunity. Thank you, General Viccellio for your answer.
Mr. BATEMAN. I now recognize Mr. Watts if he has compelling questions that can't be submitted for the record, because time is very much pressing on us.
Mr. WATTS. Well, thank you, Mr. Chairman. And I will be brief.
General Viccellio, a few weeks ago, you met with me and several members of the depot caucus. At that time, you said to me that Tinker Air Force Base was at about 89 percent of capacity.
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Subsequently, you wrote me this letter attempting to explain why this was so. And General, I find it very hard to believe that you've read this letter, because it offers no reasonable explanation for how Tinker could be at 89 percent of capacity.
The reality is that by any definition of workload capacity, any definition, Tinker is only at about 50 to 55 percent of capacity. I've seen the empty work base. I talked to the employees who are ready, willing, and able to do more but can't because the Air Force won't send them the workload. And I'm baffled at how you can continue to insist that Tinker is at 89 percent of capacity; and I'm wondering if this includes one shift working daily, or two to three shifts. And I just find no reassurance in the letter that you wrote to me.
According to the BRAC certified data, Tinker in 1995 had nearly about—had nearly 12 million hours of capacity. But today, Tinker is operating in the neighborhood of about 7 to 8 million hours. And again, I can't understand how that puts us at nearly a full workload.
I've had the opportunity to go to Tinker on a number of occasions to actually see what overcapacity exists. And by the way, that's why BRAC had their exercise to get rid of excess capacity, to see how we do this. The operation that you all are executing, this privatization in place, does not address the problem that the BRAC procedure was trying the address, and that's get rid of the excess capacity.
And again, recently, I have visited Tinker several times to look at their capacity. But recently, I saw some photos what were just taken a few weeks ago. And clearly, they show excess capacity.
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There are about six or seven different photos here that show excess capacity. And if you would see these photos, you would see there was nothing in these different facilities, they are mothballed, nothing in them at all. And again, I'm clearly baffled at how we could say that we're at 89 percent. But I would be curious for you to take another stab at, you know, convincing me that we are at 89 percent capacity, considering these pictures, considering the definitions that we all use. I say again that we're about 50, 55 percent. And, you know, I'm just—maybe I'm missing something, but I just—I just can't see that. And I had no assurance from the letter that you sent me that we were at 89 percent capacity.
General VICCELLIO. I'd like to take more time where we can talk one on one on this. But for the record, I'd like to say the following. As I outlined to you in the letter, capacity as it is defined, single shift, it is based on the number of available work positions. It is the amount of maintenance workload that can be performed based on given shop layout and workload mix.
Getting to your pictures, an empty room is not capacity. An empty room is a great place to put capacity, and in our public bid preparation, we are filling some of those rooms up, predominantly at Ogden, for the Sacramento work, with capacity.
But it takes equipment, it takes supplies, and it takes a trained work force to put capacity in an empty room. That costs money. And we're trying to determine how much.
Once you get that capacity, you can produce, and then begin to see the savings that the GAO and we agree are there. But you've got to figure out what it takes to generate that capacity. An empty room has none.
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Mr. WATTS. Well, general, empty rooms or empty bays, I can find both of them at Tinker Air Force Base, and I submit to you, under the process that we're using, this privatization in place, you're not going to—you're not going to fill up bays nor rooms under the process that we're using.
So I don't care, we can use rooms, we can use bays, we can use whatever you want to use, whatever you find at Tinker or Ogden or Warner Robins that's empty, I can guarantee you, I can assure you, you will not find any of those rooms or any of those bays filled up 10 years from now, based on the exercise that the Air Force is operating under with this privatization in place. You're going to create more empty rooms, and more empty bays under the process that we're proceeding under.
General VICCELLIO. The public-private competition process——
Mr. WATTS. Well, even under—well, General, let me say this——
Mr. BATEMAN. Whoa, whoa, whoa, whoa——
Mr. WATTS [continuing]. Public-private—everybody under the public-private——
Mr. BATEMAN. Mr. Watts, we don't have the luxury of the time this afternoon for you all to debate the issue. But certainly, General, respond briefly to anything that you haven't responded to adequately to this point, and then submit further data for the record.
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Mr. WATTS. Mr. Chairman, let me just take 15 seconds and I'll be finished. But even, general, respectfully, under that public-private scenario, we tried the public-private scenario at Altus Air Force Base, which is also in my district; the public won. And I disagree with that argument. But, again, I would love to visit with you at any time.
Thank you, Mr. Chairman.
Mr. BATEMAN. Thank you, Mr. Watts. Everyone present has had a round of questions, and in view of the fact we are going to lose control of the room, I'm going to excuse the present panel with our deep thanks for your being here today; and there may be a barrage of further questions submitted for the record for you, but we are grateful for your attendance, and thank you for being here.
For the committee, the third panel, we'll ask to come up as quickly as they can. We are going to be able to go for about a half an hour. It's very likely that we'll have to ask that you submit questions for the record for this panel, but certainly we want to hear their testimony.
I'd like for the committee members to resume their seats so we can conclude the hearing.
The third panel of witnesses today consists of Mr. Lawrence F. Skibbie, president, American Defense Preparedness Association, and the National Security Industrial Association; Mr. Barry Adams, president, National Council of Industrial Naval Air Stations; and Ms. Nancy H. Schaffer, president of Zone 7, Federal Managers Association.
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We thank you for being here, and Mr. Skibbie, you may proceed.
STATEMENT OF LT. GEN. LAWRENCE F. SKIBBIE, U.S. ARMY (RETIRED), PRESIDENT, AMERICAN DEFENSE PREPAREDNESS ASSOCIATION, NATIONAL SECURITY INDUSTRIAL ASSOCIATION
Mr. SKIBBIE. Mr. Chairman, and members of the Readiness Subcommittee, we appreciate the opportunity to testify today. With your permission, I'd like to submit my statement for the record, and briefly summarize it.
First of all, as you mentioned, I am speaking today for my association, ADPA/NSIA. It's an example of consolidation in the defense industry in that it is the product of a merger of two other associations, one founded in 1919, and another founded in 1947.
I also speak for the Industry Depot Coalition, a coalition of nine separate associations, my own included.
There are really only six points in my prepared statement, and I would just like to summarize those.
First of all, we think that we should incorporate the war fighter into the decision tradeoff process and treat him as a true customer so that he can participate in the decisions with regard to the costs and the responsiveness of the production base.
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Second, we think that we need to incorporate additional flexibility into the entire process. Specifically, we would like to see a facility based approach incorporated into the 60/40 rule such that we can look at in one location and count all the employees in that area. We believe that will work to increase workload at the public facilities involved.
Third, we would like to see the use of best value aspects in many of the other aspects of acquisition reform incorporated into this entire process.
We also think that we need to continue pressure on the Government financial systems to ensure that we have good cost comparability.
And finally, a general application of the acquisition reform precepts.
With that, I'll pass to the next witness, and be prepared for your questions.
[The prepared statement of Mr. Skibbie can be found in the appendix on page 1047.]
Mr. BATEMAN. Thank you very much, Mr. Skibbie, and your prepared statement will be made a part of the record.
Mr. Adams.
STATEMENT OF BARRY K. ADAMS, PRESIDENT, NATIONAL COUNCIL INDUSTRIAL NAVAL AIR STATIONS ASSOCIATION
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Mr. ADAMS. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear here today. The organization I represent, the National Council is a chamber of commerce type organization within the industrial naval aviation depots. We try to promote the best source of repair for naval aviation, and we think we are that.
I would like to submit my written testimony for the record, and I'll just make mine real brief since we have time constraints here.
Our concerns are core ceiling constraints and competition. The reason we address these three issues in core right now is an unknown factor. I think that the members here said it best with the last group, nobody can define core and what it is. Everytime we turn around, at least within the last 10 years, and I was here 10 years ago testifying on these same issues, core was not defined then, and it's still not defined.
We're concerned with the core workload in the future, future acquisitions primarily. As the older platforms go away, in our case the F–14's, EA6B's, the P3's, and these type of workloads, what are the depots going to be doing? We have no idea. We're looking at the F–18 ENF, we are looking at the F–414 engine. The way it appears to us now is this will be put out into the private sector and not be put in the depots. This is a concern to us. Because we know that we can provide the military a good source of repair.
Ceiling constraints is another issue that concerns us. We know now, or we've just seen indications from DOD, and defense based—or the Defense Depot Maintenance Council [DDMC] numbers, as the workload increases within the depot community, primarily Navy, the personnel go down. The numbers are there. They are not our numbers. We didn't produce them. They came from the DDMC, but yet those numbers are showing that again we're being placed under ceiling constraints. We have to have flexibility to be able to hire and fire people as the need arises.
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By placing ceiling constraints on the depots, you're creating overtime that you have to use, which again will hurt your work force because of the amount of time they have to work. It hurts their families. Either you contract it out or the new case is you contract it in. You hire contractors to work next aside your employees. We currently have a situation within Jacksonville where we're hiring the OEM employees to work on the F–14. We have to train those people. These are people coming from the manufacturer.
So ceiling constraints are a big concern of ours, and we would like to have the option within the depot community to hire temporaries and terms.
The other issue we have of course is competition, which seems to be on everybody's mind. We've seen competition work within the depot community. As the GAO reported in their reports 2 years ago, competition works, we're not afraid of it. But we would like to see the competition level changed. We would like to be able to go out there for some of that private sector workload and give us the option or the mandate to be able to participate against some of that workload.
As Congressman Fowler indicated, we did that with the F1D2 engine for the F–117 Stealth. We took it away from GE, we reduced the cost by 48 percent. This is not workload that was designated core. I don't know how, but it wasn't. Yet we are willing to compete and we'll work with anybody and do whatever we have to. But we'd like to see that changed where we have also the ability to compete for workload that's in the private sector that's depot maintenance type work.
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And at that, I conclude my statement and will be open to any questions.
[The prepared statement of Mr. Adams can be found in the appendix on page 1056.]
Mr. BATEMAN. Thank you, Mr. Adams.
Ms. Schaffer.
STATEMENT OF NANCY H. SCHAFFER, PRESIDENT, ZONE 7, FEDERAL MANAGERS ASSOCIATION
Ms. SCHAFFER. Thank you. My name is Nancy Schaffer, and I'm currently president of the Federal Managers Association, Zone 7, which is the West Coast, and I head the FMA's privatization task force. I represent on behalf of 200,000 managers and supervisors in the Federal Government whose interests are represented by FMA. We want to thank you for holding this important meeting.
As you all have indicated, this is of such importance that we really should not equivocate and take too little time on these issues.
What we would like to say is that we have five recommendations. Primarily, we do not feel that DOD has created an industrial base support target strategy for depot privatization. Rather, they have ill defined core, and they have not looked at systems as a whole.
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And in the course of that, we have five recommendations for policymakers to consider when you're determining the distribution of workload between the public and private sector to ensure cost effectiveness and efficiency.
Support and uphold the statutory requirements under 10 U.S.C. 2466 and 10 U.S.C. 2469. The 60 percent of military hardware maintenance work must be performed at military service depots, and the DOD must conduct public-private competition before workloads in excess of $3 million are transferred to the public sector.
These rules were—these laws were put into place for a reason, and they do allow for a strike free and mobile work force. We need to empower our public managers with the authority and the discretion to instill cost effective restructuring, and management methodologies of public depots to improve the efficiency of workloads. We know what we need to do. We should be allowed to do it.
Three, convert depot upper management positions from military to civilian to improve long-term strategic management capability.
Public depots have many layers of management and personnel that were created during the previous era of defense buildup. Many upper management positions in public depots are military appointments.
FMA believes that a conversion of many of these positions will gain cost savings and personnel overhead, and transfer more management responsibility of the depots to career civil servants.
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Conversion will also afford experienced civil managers the opportunity to manage, to budget, and base decisions on long-term strategic interests of the depot. This will release highly trained and skilled military personnel to the fighting forces.
Four, conduct public-public and public-private competitions for noncore depot work, and public-public competitions for core work to ensure cost savings for taxpayers, and the opportunity for public depots to restructure and reorganize to competitively earn depot contracts.
Our last recommendation is restructure as much of the workload at air logistic centers at Kelly and McClellen Air Force bases as practical without impacting Air Force readiness or compromising the organic workloads of the three remaining bases.
As has been stated previously, the definition of core seems to appear somewhat lacking. There seems to be a need for a systems approach and a process change.
To that end, I'm open to questions.
[The prepared statement of Ms. Schaffer can be found in the appendix on page 1069.]
Mr. BATEMAN. Thank you, Ms. Schaffer. You covered a lot of ground very, very, quickly, we appreciate that, and your sensitivity to our unfortunate time constraints.
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Let me say that statements submitted by the American Federation of Government Employees and from their affiliate in San Antonio will be accepted and made a part of the record.
[The information referred to can be found in the appendix on page 1077.]
Mr. BATEMAN. All of your prepared statements will be made a part of the record.
I've asked Mr. Steffes if he would prepare for the record and submit a question concerning this contracting-in phenomena that we've heard about today, and I'd like to have some sense of the dimensions and significance of that.
With that, I'll now recognize Mr. Sisisky for any questions he may have.
Mr. SISISKY. Because of the time constraints, Mr. Chairman, I appreciate all of you being here. I think you know how I feel about most of your recommendations, and I would pass now.
Mr. BATEMAN. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman. I'll keep mine to a minimum this time around, because I appreciate the good work you all do.
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But, you know, we've talked a lot about competition, and I'm hearing what you all are saying, which is what I hear from my folks at Robins every single day, and in Albany, and that is we welcome competition. Give us a level playing field and dadgum it, we'll hang in there with anybody.
Now, we did something, and that was pound on the administration to allow us to team with each other from the standpoint of trying to come up with competitive bids. We've also been trying to tell the administration that we ought to be allowed to team with the private sector, because what we're after is the best deal for the American taxpayer. Now, certainly, that's not going to be the case in every instance, but we all know that there's some things that the private sector does better than we do. We readily admit that.
Do you all see a problem with being allowed to team with the private sector in competitive biddings, and does that help level the playing field?
Mr. ADAMS. Well, sir, I know from our aspect, right now we're partnering with the private sector on the F–14 and EA–6B. We're going back to Grumman, the OEM and said, ''Look, we can't—'' because the BRAC process in 1993, and the Navy's decision to close three depots as fast as they did, it created excess workload that the depot in Jacksonville could not handle.
So therefore, we went to the original equipment manufacturer [OEM] and said, ''Look, we need you to help us out of a tight bind. We've got extra aircraft we're unable to handle, so please take them.''
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So that's what's happened within the F–14 and EA–6B community. I see why there would be no reason we shouldn't partner with private industry if it's to the advantage of the DOD and the taxpayers. That's the whole purpose, you know. But I think one of the problems that we have is losing sight of the fact that the depot's responsibility is to be there in case something happens 24 hours a day, 7 days a week. And I think that's one of the things that a lot of people lose sight of.
But on the competition, we would see that the competition would establish the work force at its core, and anything above that would be terms or temporaries, not full-time Federal employees. And that's the other misconception people have, that if we win the workload, let us go out and hire these people that we need to do it as a temporary or term employee for the life of the contract. That's the benefit. That benefits everybody.
Mr. SKIBBIE. Mr. Chambliss, if I could just add to that, if you don't mind.
Certainly industry welcomes the opportunity to partner in a true partnering relationship. One of the concerns we have is that there are some impediments to partnering as we see the system operate now. One is the 60/40, and the application of those limitations on a faces basis, on a personnel basis, as opposed to a location basis. So that if we could broaden those constraints and apply 60/40 to a location, if you will, so that regardless of who the employer is, it counts against the 60. Because the way it is now, it would seem to me that we're in a sense discriminating against people based upon who signs their paycheck, even though they may be doing basically the same work at a location.
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The second thing that could be—is sometimes an impediment to partnering is the $3 million limitation; because you may be up against one of those limits, and when you take a contract and it exceeds the $3 million, even though you might like to partner, it has to be put up for a public-private competition.
And so if there could be a little more flexibility somehow incorporated into the system, we think that partnering would grow dramatically. You would see increased workload come into some of the public sector.
Ms. SCHAFFER. I think partnering is one of those things we have to do, as money belongs to the American taxpayer. I think partnering is one of those things not only can you gain money, you can also gain the efficiencies and effectiveness you want. You can also have that surge capability. But you've got to make it so the depots are competing equally. Right now we can't advertise. We can't do certain types of things which preclude us from acting like a private business, yet we're told to be a business. There has to be some comparability between both parts of the whole.
Mr. CHAMBLISS. Thank you.
Mr. BATEMAN. Mrs. Fowler.
Mrs. FOWLER. Thank you, Mr. Chairman. It does look like we're going to make it.
I want to thank all three of you and commend you for the great work you do, and special thanks to my good friend, Barry Adams, who is a great representative of all the employees at our native Jacksonville as well as members of the National Council. So I'm glad you're here, and you all put it very well what the concerns are, and I just have a couple of questions, one of Mr. Adams.
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I've recently heard from a number of individuals who have expressed concerns about something that's going on now, and this is the ''V-sipping'' process whereby Federal employees are taking this early retirement option. Under this ''V-sip'' program they are paid about $25,000 for doing this, and then turn around the very next day, or the next week, and they are showing up at the depot, working doing the same job, working for a contractor versus working for the depot.
Now, I know this isn't the concern of the depot system, but I think it's a concern of the whole Federal Government, and partly the depot system, because what we're doing as the Federal Government, if you've got an employee who say has been working for the depot marking $40,000 a year, gets his $25,000 reward for ''V-sipping,'' comes back, now is going to work at the depot doing the same job for the contractor. He's collecting his Federal pension, he's being paid now by the contractor, and a lot of times more money. So instead of making $40,000 a year, he's making $50,000, $60,000, or so a year. And overall, that's costing the system more money. And yet we're not getting any different work done or any more work done, and we're spending more dollars out of the whole Federal pie.
Do you have any comment on that? Are you seeing that happen?
Mr. ADAMS. Yes, ma'am. I would like to comment on it. Yes, we're seeing that within Jacksonville.
As I said earlier, we're in a mode right now that we cannot increase our personnel level. We're being told, even though the public law states that there will be no ceiling constraints, we're being told yet you're going to hold yourself to a ceiling level of 4,264 people. We've got workload to accommodate more than that.
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So what we're having to do now is we're having to hire contractors, and these people are working right alongside ours. And as I said earlier, we're having to train some of these people. Some of these people are former depot employees—they retire Friday, Monday morning they are back at the front door coming back in doing jobs. It doesn't make any sense. I don't understand how it's happening. I know that for years Congressman Bennett tried to work on this issue with this committee and others to stop what they call the revolving door, to stop these type of things, where if you are working for the Government in a particular job, you cannot come back into the Federal Government again. That would be a military or civilian employee. Under the current ''V-sip'' regs, you can leave but you cannot come back to work for the Government as a Government employee. Doesn't say anything about a contract employee.
So that may be something this committee wants to look at as far as changing the language of the law to where it says if you accept that ''V-sip'', you cannot come back to work for the government as a contract personnel, and/or a civilian personnel.
Mrs. FOWLER. Well, I do think, Mr. Adams, it's something I'd like to ask the chairman, maybe we can get some analyses from the appropriate people on how much more we are spending on this procedure happening, because I understand it's happening in other depots also, what we're paying these people through the contracts. So I'd like to see a side-by-side analysis. I understand some of these jobs, we're paying them say $35,000 working for the depot, and then they are making more than that working for the contractor. But we're, bottom line, still paying more. I think we need to get some information on it, and take a hard look at it. Because it works in our overall equation.
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And can I just one other thing, Mr. Chairman, real quickly, is——
Mr. SKIBBIE. Congressman Fowler, can I just make one point there?
Mrs. FOWLER. Yes.
Mr. SKIBBIE. I don't think the people you're talking about are decisionmakers. But there are very tight constraints on anyone working for the Government in a decisionmaking role in the procurement system, and they cannot go out and work for a contractor on a contract that they had anything to do with. And—I mean, that's goes on for the lifetime.
Mrs. FOWLER. Yes. These are the people turning the wrenches and the work.
Mr. SKIBBIE. Yes.
Ms. SCHAFFER. I believe Eleanor Norton Holmes has a bill before Congress to talk about that right now, to preclude people from doing that, revolving door type of mechanism. That is one that does need to be taken a hard look at.
Mrs. FOWLER. Right. And then just one point I'd like to make to General Skibbie, because I know you'll be, in your role, having a lot more discussions with the administration; and we, unfortunately, have reached a point up here where there's not a whole lot of trust level between us and the OSD and the administration on this whole issue of depots and the privatization issues. And hopefully, you can encourage them to look at other options other than the ones that they are pursuing at Sacramento, and at San Antonio, looking at what really is the best-value approach for the taxpayer, and for the Government, because the line they are taking right now is certainly not a recipe for moving forward on this.
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So thank you, and again I thank you all three, and thank you Mr. Chairman, for continuing.
Mr. BATEMAN. Thank you, Ms. Fowler. And if you would, I've asked staff to work with you on formulating the kind of questions in order to get at the information that you feel that is necessary, and which I think would be contributory to our work.
If witnesses have anything further they would like to add for another 5 minutes or so before we are thrown out of the room, we'd be happy to hear further from you. And we may have some questions that will get submitted for the record.
I apologize for the fact that the time constraints have been such as they are.
Ms. SCHAFFER. I appreciate the opportunity. Thank you.
Mr. ADAMS. Thank you, Mr. Chairman.
Mr. SKIBBIE. Thank you.
Mr. BATEMAN. Thank you all three, and we do have a few more minutes if there's anything further you'd like to add.
Mr. SKIBBIE. I think all I could do would be to restate my statement, and you already have that, and I think our big message is put more flexibility into the system, and as we do that, I think industry will be able to accommodate that, and we will have a win-win situation for both public and private.
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Mr. BATEMAN. Thank you very much. Thank you all.
[Whereupon, at 1:17 p.m., the subcommittee was adjourned.]
[The questions and answers submitted for the record can be found in the appendix on page 1273.]
"The Official Committee record contains additional material here."
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