Counting numbers

Every large organization must face the difficult question of which activities to perform in-house and which to contract out. In many cases, a decision to outsource functions that are peripheral to an organization's core business can be an effective way to reduce overhead costs and focus attention on issues of more central importance to the organization's success.

The decision of whether to outsource an activity must include a thorough analysis of potential financial impacts and other, noncost-related considerations. The one exception to this is the Defense Department, for which everything must be reduced to a single financial calculation. DOD agencies cannot consider factors that are not quantified.

By statute, a DOD agency may not contract out a commercial function that is performed by government employees unless "performance of the function by the private sector will result in savings to the government over the life of the contract." To outsource that work, the agency must show that doing so will result in a "cost that is lower" than performance by the government.

Civilian agencies are not subject to this statutory restriction. However, as the General Accounting Office's Commercial Activities Panel recently reported, few civilian agencies have even attempted a review of outsourcing.

These facts are important in the context of the recent Office of Management and Budget proposal to revise its Circular A-76 guidelines for the conduct of federal agency outsourcing decisions. Under the current version, the entire outsourcing decision is reduced to a financial calculation, whereby an activity is contracted out only when doing so will produce cost savings. In this way, it is similar to the statutory restriction on DOD agencies.

In its proposed revision, OMB would allow agencies to employ a new "cost-technical trade-off source selection integrated evaluation process" for deciding whether to contract out information technology functions and certain other activities. The proposed new process would allow agencies to use considerations other than the lowest cost by providing "a narrative explanation of the trade-offs and a quantifiable rationale."

GAO expressed concern in a Jan. 16 letter to OMB with the ambiguous nature of the term "quantifiable" and recommended that OMB provide additional guidance in that area. This is a perfectly valid point, as far as it goes. But it misses a much bigger issue.

For DOD agencies that perform nearly all of the A-76 reviews, it is not enough that the benefits of outsourcing are potentially quantifiable. Rather, by statute, the agency actually must quantify them. Absent the showing of a real, tangible monetary savings, a DOD agency may not decide to contract out an activity.

There are ways to work around this point, but they are not discussed in the proposed Circular A-76 revision.

Some of them will be addressed in my next column. n

Peckinpaugh is corporate counsel for DynCorp in Reston, Va. This column represents his personal views.