# Sourcing Policy: Selected Developments and Issues > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3AR42341 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** February 7, 2012 - **Citation:** R42341 ## Text Sourcing Policy: Selected Developments and Issues -name redactedSpecialist in American National Government February 7, 2012 Congressional Research Service 7-.... www.crs.gov R42341 CRS Report for Congress Prepared for Members and Committees of Congress Sourcing Policy: Selected Developments and Issues Summary Dating back to the 1950s, federal sourcing policy generally has focused on the premise that the government should rely on the private sector for the provision of certain goods and services. Additionally, it has centered around guidance for conducting public-private competitions to determine whether federal employees, or contractor employees, should be selected to perform certain agency functions. The Administration of President George W. Bush, in particular, emphasized subjecting eligible agency functions to public-private competitions. Branding this policy, and related guidance, as competitive sourcing, the Bush Administration included it as one component of the President’s Management Agenda. During the Administration of President Barack Obama, another strain, or facet, of sourcing policy surfaced. Labeled multi-sector workforce management by the Administration, it posits that federal agencies might be susceptible to overreliance on contractors, which could affect the ability of agencies to maintain control over their missions and operations. OMB’s July 2009 memorandum provides guidance to agencies on how to manage their multi-sector workforces. The Office of Federal Procurement Policy’s Policy Letter 11-01—by providing a single, consistent definition of inherently governmental and guidance for identifying and managing inherently governmental functions, functions closely associated with inherently governmental functions, and critical functions—complements the Administration’s multi-sector workforce management policy. This letter was issued in September 2011. Congressional interest in sourcing policy, generally, has been evident for some time. For example, in 1998, the Federal Activities Inventory Reform (FAIR) Act (P.L. 105-270) was signed into law. It requires certain federal agencies to compile, and submit annually to OMB, inventories of their commercial activities, which are activities that may be performed by federal employees or a government contractor. Recent signs of interest in sourcing policy include two substantively similar but identically titled bills that were introduced during the 112th Congress. H.R. 1474 and S. 785, the Freedom From Government Competition Act, contain provisions that would expand upon existing policies designed to encourage federal government reliance on the private sector for the provision of both goods and services. This report provides an overview of the evolution of federal sourcing policy to date and identifies the major policy issues before Congress. It is not a legislation tracking report. This report will be updated as events warrant. Congressional Research Service Sourcing Policy: Selected Developments and Issues Contents Introduction...................................................................................................................................... 1 Background...................................................................................................................................... 3 Key Terms: Commercial and Inherently Governmental ............................................................ 3 Commercial Activities......................................................................................................... 4 Inherently Governmental Functions.................................................................................... 5 The Role of the Private Sector................................................................................................. 11 Recent Developments in the History of Sourcing Policy .............................................................. 18 Competitive Sourcing.............................................................................................................. 18 Commercial Activities Panel’s Sourcing Principles ................................................................ 21 Statutory Requirement for Agencies to Develop Insourcing Guidelines................................. 22 OMB Memorandum on Multi-Sector Workforce Management .............................................. 24 Framework for Managing the Multi-Sector Workforce .................................................... 25 Multi-Sector Workforce Pilot ............................................................................................ 26 Insourcing Guidance ......................................................................................................... 26 Office of Federal Procurement Policy’s Policy Letter 11-01................................................... 28 Policy Issues .................................................................................................................................. 29 Competitive Sourcing, Multi-Sector Workforce Management, and Insourcing ...................... 29 The Federal Government’s Reliance on Contractors............................................................... 31 A Typology of Government Functions .................................................................................... 33 Personnel Sustainment ...................................................................................................... 34 An Institutional Perspective .............................................................................................. 34 Outcomes and Data.................................................................................................................. 35 Cost Considerations................................................................................................................. 39 Cost Analysis..................................................................................................................... 39 Are Cost Savings a Goal of Multi-Sector Workforce Management? ................................ 46 Resources................................................................................................................................. 47 Department of Homeland Security’s Balanced Workforce Strategy ....................................... 48 Concluding Remarks ..................................................................................................................... 51 Tables Table 1. Definitions of Commercial and Inherently Governmental................................................. 6 Table 2. Policy History of Governmental Reliance on the Private Sector ..................................... 11 Table 3. Selected Features of Competitive Sourcing and Multi-Sector Workforce Management ............................................................................................................................... 30 Table 4. Conceptual Elements of the Market System and the Public Policy Process .................... 35 Appendixes Appendix. Selected Sources .......................................................................................................... 52 Congressional Research Service Sourcing Policy: Selected Developments and Issues Contacts Author Contact Information........................................................................................................... 53 Congressional Research Service Sourcing Policy: Selected Developments and Issues Introduction Sourcing policy refers, generally, to determining which sector—public (government) or private— will perform an agency’s function(s). Both federal employees and contractor employees have valid roles to play in performing the work of the federal government. This combined workforce is known as a blended workforce.1 Determining which sector will perform which functions, including determining when federal employee performance is, or should be, required can be challenging, however. Efforts to address this issue, and related questions, have been the subject of the federal government’s sourcing policy since at least the 1950s. Sourcing policy is not so much a product of coordinated planning and implementation as it is an amalgamation of statutory provisions, policy letters, administrative directives,2 and guidance issued by various presidential administrations. Sourcing policy has been at the root of contentious debates, which may complicate the somewhat murky picture. This brief overview of the report is provided to assist in navigating the subject of sourcing policy. Sourcing policy encompasses two major strains. Delving into the history of sourcing policy is necessary for understanding the strain that emerged in the 1950s, and for providing context for the strain that emerged during President Barack Obama’s Administration. The latter strain has not necessarily displaced, or replaced, the former strain, though it might not always be clear to outside observers what actions agencies are taking, or are expected to take. The complexity might be due, at least in part, to the ad hoc fashion in which sourcing policy has evolved and the mix of government documents involved. The strain that emerged first, with the issuance of three Bureau of the Budget (BOB) bulletins in the 1950s, emphasizes governmental reliance on the private sector for the provision of goods and services.3 An unwritten corollary of this strain of sourcing policy has been that certain functions performed by federal employees may be subjected to public-private competition. A competition 1 While acknowledging that there is “no common agreement on a definition of the multisector [or blended] workforce,” a working group of the National Academy of Public Administration (NAPA), provides an expanded description of this term. The multi-sector workforce consists of “federal, state and local civil servants (whether full- or part-time, temporary or permanent); uniformed personnel; and contractor personnel [who] often work on different elements of program implementation, sometimes in the same workplace, but under substantially different governing laws, different systems for compensation, appointment, discipline, and termination; and different ethical standards.” (National Academy of Public Administration, Managing Federal Missions With a Multisector Workforce: Leadership for the 21st Century,” November 16, 2005, p. 1, at https://www.acquisition.gov/comp/aap/documents/ National%20Academy%20of%20Public%20Administration%20%2012%2016%2005.pdf.) Another description says that the “the type of workplace arrangement” where “contractor personnel work alongside federal employees in the federal workspace; often performing identical functions … has become known as a ‘blended’ or ‘multisector’ workforce.” (Acquisition Advisory Panel, Report of the Acquisition Advisory Panel to the Office of Federal Procurement Policy and the United States Congress, January 2007, p. 392, at https://www.acquisition.gov/comp/aap/ finalaapreport.html.) The Obama Administration uses the term multi-sector workforce. (See “OMB Memorandum on Multi-Sector Workforce Management.”) The Government Accountability Office uses the term total workforce. (U.S. Government Accountability Office, Civilian Agencies’ Development and Implementation of Insourcing Guidelines, GAO-10-58R, October 6, 2009, p. 7, at http://www.gao.gov/new.items/d1058r.pdf.) The Department of Homeland Security uses the term balanced workforce. (See “Department of Homeland Security’s Balanced Workforce Strategy.”) 2 Chief among these is Office of Management and Budget Circular A-76, which is discussed below. 3 The Bureau of the Budget was the precursor to the Office of Management and Budget (OMB). Additional information regarding these bulletins is provided below. Congressional Research Service 1 Sourcing Policy: Selected Developments and Issues determines whether the incumbent workforce would continue to perform the work, or the agency would award a contract to a private company to perform the work. Circular A-76, which was issued initially in 1966, continued this policy of governmental reliance on the private sector and provides guidance and procedures for carrying out public-private competitions. The Office of Management and Budget has published five revisions to the circular. The current circular (or revision) was released in May 2003. Generally, the term introduced by the Administration of President George W. Bush—competitive sourcing—is associated with this strain of sourcing policy.4 Throughout the history of sourcing policy, only certain functions have been eligible for publicprivate competitions. Beginning with the Bureau of the Budget bulletins published during the Eisenhower Administration, only agency functions identified as commercial may be subjected to public-private competitions. Any agency function designated as governmental (or, later, inherently governmental) must be performed by federal employees. With the continued emphasis on governmental reliance on the private sector finding expression in a “[g]overnment policy [that] has favored contracting for goods and services rather than providing them in-house,”5 the commercial/inherently governmental dichotomy and the focus on public-private competitions sufficed for a number of years. As the needs of the government expanded over the years, however, contracting for services grew, both in terms of the amount spent on contracts and the types of services provided by contractors. Notably, the federal government’s short-term and long-term responses to the terrorist attacks of September 11, 2001, involved a significant growth in service contracting. The federal government invaded Afghanistan and then Iraq; added a new department tasked with safeguarding the homeland; and embarked upon a raft of new initiatives and programs involving, for example, intelligence, transportation security, and cybersecurity. Determining who should do the work of the federal government became more challenging as, for example, certain practices were called into question (e.g., using companies to conduct passenger screening at airports); controversy swirled around some events that involved private security contractors (e.g., private security guards reportedly shot Iraqi civilians in 20076); and concerns surfaced that, in the rush to expand its capabilities, the federal government was at risk of having contractor employees perform inherently governmental work. Thus, the second strain of sourcing policy that has emerged focuses on ensuring that the federal government has the best, or most appropriate, mix of federal employees and contractor employees. The Obama Administration, through guidance issued by the Office of Management and Budget, refers to this strain as multi-sector workforce management. Unlike competitive sourcing, the multisector workforce management strain relies chiefly (though not entirely) on an expanded typology of functions and associated guidance to determine who—federal employees or contractor employees—should perform which agency functions. Additions to the existing typology (commercial functions and inherently governmental functions) are critical functions and functions closely associated with inherently governmental functions. According to the Obama Administration’s guidance, multi-sector workforce management was devised to ensure that 4 Any mention of President Bush or the Bush Administration in this report refers to President George W. Bush. U.S. Commission on Government Procurement, Report of the Commission on Government Procurement, Volume 1, Washington, DC, December 1972, p. 57. 6 James Glanz and Alissa J. Rubin, “Blackwater Shootings ‘Murder,’ Iraq Says,” New York Times, October 7, 2007, at http://www.nytimes.com/2007/10/08/world/middleeast/08blackwater.html?pagewanted=all. 5 Congressional Research Service 2 Sourcing Policy: Selected Developments and Issues agencies’ reliance on contractors is not excessive.7 Restated, this strain focuses on ensuring that agencies, not contractors, perform inherently governmental functions, and that agencies retain control over their mission and operations.8 This report begins with a history of sourcing policy that focuses on the terms commercial and inherently governmental, and the policy of government reliance on the private sector. The following section examines the two strains of sourcing policy: competitive sourcing and multisector workforce management. The juxtaposition of the Bush Administration’s competitive sourcing initiative and the Obama Administration’s multi-sector workforce management effort aids in understanding different, yet potentially complementary, facets of sourcing policy. Policy issues that may be of interest to the 112th Congress are also discussed. Background Key Terms: Commercial and Inherently Governmental Familiarity with the terms commercial and inherently governmental is integral to understanding the federal government’s sourcing policy and related issues.9 A commercial activity may be performed by a contractor employee or a federal employee. An inherently governmental function may be performed only by federal employees.10 Although, at times or under certain circumstances, other terms have been used, such as core functions, government-wide sourcing policy, generally, has relied on this dichotomy: a government function (or activity)11 is either commercial or inherently governmental. 7 Peter R. Orszag, Director, U.S. Office of Management and Budget, “Managing the Multi-Sector Workforce,” July 29, 2009, p. 1, at http://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_fy2009/m-09-26.pdf. 8 Office of Federal Procurement Policy, “Publication of the Office of Federal Procurement Policy (OFPP) Policy Letter 11-01, Performance of Inherently Governmental and Critical Functions,” 76 Federal Register 56227-56242, September 12, 2011, at http://www.gpo.gov/fdsys/pkg/FR-2011-09-12/pdf/2011-23165.pdf. 9 For the purposes of sourcing policy, commercial has a different meaning than commercial item, which is a term used in government procurement generally. The definition of commercial item reads in part: A commercial item is “(1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and—(i) Has been sold, leased, or licensed to the general public; or (2) Has been offered for sale, lease, or license to the general public....” (48 CFR §2.101(a).) 10 “Contracts shall not be used for the performance of inherently governmental functions.” (48 CFR §7.503(a).) 11 Historically, the words activities and functions have been treated as synonyms. That is, it has been general practice to use the terms commercial activities and inherently governmental functions. An American Bar Association white paper attempted to clarify these terms, noting that “people who occupy positions perform functions. Activities are groups of people who perform functions; i.e., assigned duties, to achieve objectives, including supporting others—at least that is the sense in which OMB Circular A-76 uses the term ‘activity.’” (Task Force of the American Bar Association Public Contract Law Section, “Work Reserved for Performance by Federal Government Employees, OFPP Draft Policy Letter dated March 31, 2010, Issues and Challenges,” white paper, June 16, 2010, p. 4, at http://www.americanbar.org/ content/dam/aba/migrated/contract/wp061610.authcheckdam.pdf.) The Office of Federal Procurement Policy addressed this issue in the preamble accompanying its policy letter on inherently governmental and critical functions. (See “Office of Federal Procurement Policy’s Policy Letter 11-01.”) OFPP wrote that it “recognizes that the terms [function, activity, and position] have different meanings and agrees that more careful use of these terms may help to avoid inappropriately broad generalizations regarding the characterization of work. A function, for example, often includes multiple activities, or tasks, some of which may be inherently governmental, some of which may be closely associated with inherently governmental work, and some may be neither.” (Office of Federal Procurement Policy, “Publication of the Office of Federal Procurement Policy (OFPP) Policy Letter 11-01, Performance of Inherently Governmental and (continued...) Congressional Research Service 3 Sourcing Policy: Selected Developments and Issues An agency may choose to subject a commercial activity to a public-private competition. The competition is held to determine who will perform the work in the future: the incumbent workforce (usually federal employees) or the competitor (usually a contractor). Office of Management and Budget (OMB) Circular A-76 provides the policy and guidance governing public-private competitions.12 As discussed below, a description of commercial activity appeared initially in a 1955 Bureau of the Budget (BOB) bulletin and a definition was published in 1966. A written definition of inherently governmental was first published in 1979.13 Commercial Activities Bureau of the Budget Bulletin 55-4 may have been the first policy document that addressed the idea that a government activity may be commercial in nature. The relevant passage is as follows: In determining whether an activity is “commercial” in nature and “could be procured … through ordinary business channels,” reference may be made to the Standard Industrial Classification Manual and to ordinary business practice with respect to procurement of services or products. The inclusion of an activity in the manual will be generally considered indicative that it may be procured commercially. There will be excluded from coverage as noncommercial, however, those functions which are a part of the normal management responsibilities of a Government agency or a private business of comparable size (such as accounting, personnel work, and the like).14 Eleven years later, the Bureau of the Budget provided a definition of commercial activity. The definition, which was included in the original Circular A-76, reads as follows: A Government commercial or industrial activity is one which is operated and managed by an executive agency and which provides for the Government’s own use a product or service that is obtainable from a private source.15 The word industrial was dropped with the publication of the 1983 revision to Circular A-76. The current definition of commercial activity, which features the term recurring service, may be found in the 2003 version of Circular A-76. [A commercial activity is a] recurring service that could be performed by the private sector. This recurring service is an agency requirement that is funded and controlled through a contract, fee-for-service agreement, or performance by government personnel. Commercial (...continued) Critical Functions,” p. 56233.) Determining the appropriate circumstances under which to use the term activity or function is beyond the scope of this report. Hence, this report adheres to longstanding practice and uses the terms commercial activity and inherently governmental function. 12 The circular may be found at http://www.whitehouse.gov/sites/default/files/omb/assets/about_omb/ a76_incl_tech_correction.pdf. 13 The Bureau of the Budget was the predecessor to the Office of Management and Budget. 14 U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 55-4, January 15, 1955, p. 2. 15 U.S. Bureau of the Budget, “Policies for Acquiring Commercial or Industrial Products and Services for Government Use,” Circular No. A-76, March 3, 1966, p. 1. (Underlining in original.) Congressional Research Service 4 Sourcing Policy: Selected Developments and Issues activities may be found within, or throughout, organizations that perform inherently governmental activities or classified work.16 Under the Federal Activities Inventory Reform (FAIR) Act (P.L. 105-270), agencies are required to submit inventories of their commercial activities to OMB by June 30 of each year. An agency’s inventory is to include, for each activity listed, the “number of full-time employees [FTEs] (or its equivalent)” needed for government performance.17 Inherently Governmental Functions A definition of the term governmental function did not appear in a sourcing policy document until 1979, 24 years after the term commercial was introduced. The definition of governmental function, which was included in the 1979 revision to Circular A-76, was as follows: A “Governmental function” is a function which must be performed in-house due to a special relationship in executing governmental responsibilities. Such governmental functions can fall into several categories: (1) Discretionary application of Government authority…. (2) Monetary transactions and entitlements…. (3) In-house core capabilities….18 The term commonly used today, inherently governmental function, appeared initially in the Office of Federal Procurement Policy’s (OFPP’s) Policy Letter 92-1, which was issued in September 1992. (The letter was superseded by the 2003 revision to Circular A-76.) Policy Letter 92-1 provided the following definition: As a matter of policy, an “inherently governmental function” is a function that is so intimately related to the public interest as to mandate performance by Government employees. These functions include those activities that require either the exercise of discretion in applying Government authority or the making of value judgments in making decisions for the Government. Governmental functions normally fall into two categories: (1) the act of governing, i.e., the discretionary exercise of Government authority, and (2) monetary transactions and entitlements.19 Currently, there are three primary definitions of inherently governmental, which may be found in Circular A-76,20 48 CFR §2.101(a),21 and Section 5(1)(A) and (B) of the FAIR Act.22 Charged 16 U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, p. D-2, at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a076/ a76_incl_tech_correction.pdf. 17 Section 2(a) of P.L. 105-270. A full-time equivalent is the “staffing of Federal civilian employee positions, expressed in terms of annual productive work hours (1,776) rather than annual available hours that includes non-productive hours (2,080 hours).” (U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, p. D-5.) 18 U.S. Office of Management and Budget, “Acquiring of Commercial or Industrial Products and Services Needed by the Government; Policy Revision,” April 5, 1979. (This is the March 29, 1979 revision of Circular A-76.) (Italics in original.) The full description of the third category is as follows: “(3) In-house core capabilities in the area of research, development, and testing, needed for technical analysis and evaluation and technology base management and maintenance. However, requirements for such services beyond the core capability which has been established and justified by the agency are not considered governmental functions.” (Ibid.) (Italics in original.) 19 Office of Federal Procurement Policy, “Inherently Governmental Functions,” Policy Letter 92-1, September 23, 1992, p. 2, at http://www.whitehouse.gov/omb/procurement_policy_letter_92-01/. 20 See p. A-2 of Circular A-76, at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a076/ a76_incl_tech_correction.pdf. Congressional Research Service 5 Sourcing Policy: Selected Developments and Issues with developing a single consistent definition of inherently governmental,23 however, OFPP selected the FAIR Act definition, which it included in its 2011 policy letter on inherently governmental functions and critical functions.24 This definition reads as follows: The term “inherently governmental function” means a function that is so intimately related to the public interest as to require performance by Federal Government employees…. The term includes activities that require either the exercise of discretion in applying Federal Government authority or the making of value judgments in making decisions for the Federal Government, including judgments relating to monetary transactions and entitlements.25 Under the Bush Administration, OMB required agencies to submit inventories of their civilian inherently governmental positions when they submitted their commercial activities inventories to OMB each year.26 Table 1 provides the definitions and descriptions of commercial and inherently governmental that have been used at various times since 1955. The current definition of commercial may be found in Circular A-76 (2003) while the current definition of inherently governmental may be found in P.L. 105-270, which is the Federal Activities Inventory Reform (FAIR) Act. Table 1. Definitions of Commercial and Inherently Governmental 1955-Present Document (year) Bulletin 55-4 (1955) Definition or Description of Commercial Activity Definition or Description of Inherently Governmental “In determining whether an activity is ‘commercial’ in nature and ‘could be procured … through ordinary business channels,’ reference may be made to the Standard Industrial Classification Manual and to ordinary business practice with respect to procurement of services or products. The inclusion of an activity in the manual will be generally considered indicative that it may be procured commercially. There will be excluded from coverage as noncommercial, however, those functions which are a No entry. (...continued) 21 See also Subpart 7.5 of Tile 48 of the Code of Federal Regulations. 22 While certain elements of all three definitions are the same, or similar, such as the phrase intimately related to the public interest, there is variation among other terms used in the definitions, including function and activity, employees and personnel, and government and Federal Government. A particularly notable difference, some commentators would suggest, is that the 2003 circular mentions the exercise of substantial discretion while neither of the other two definitions includes the modifier substantial. 23 Section 321 of P.L. 110-417. 24 See “Office of Federal Procurement Policy’s Policy Letter 11-01.” 25 Section 5(2)(A) and (B) of P.L. 105-270. 26 Sean O’Keefe, Deputy Director, U.S. Office of Management and Budget, “Year 2001 Inventory of Commercial Activities,” memorandum M-01-16, April 3, 2001, p. 1, http://www.whitehouse.gov/sites/default/files/omb/ memoranda/m01-16.pdf. Congressional Research Service 6 Sourcing Policy: Selected Developments and Issues Document (year) Definition or Description of Commercial Activity Definition or Description of Inherently Governmental part of the normal management responsibilities of a Government agency or a private business of comparable size (such as accounting, personnel work, and the like).” Bulletin 57-7 (1957) “In determining whether an activity is ‘commercial’ in nature and ‘can be procured … through ordinary business channels,’ reference may be made to the Standard Industrial Classification Manual, to the availability of the service or product on a competitive basis, and to ordinary business practice with respect to procurement thereof. The inclusion of an activity in the manual will be generally considered indicative that it may be procured through ordinary business channels. There will be excluded as noncommercial, however, those functions which are a part of the normal management responsibilities of a Government agency or a private business of comparable size (such as accounting, personnel work, and the like)….” No entry. Bulletin 60-2 (1959) “‘Commercial-industrial activity … for its own use’ includes the provision of services or products primarily for the use of a Government agency (whether the providing agency or other agencies), but excludes, for the purpose of this Bulletin, activities producing a service or product primarily for the public or agency employees. Also excluded are functions which are a part of the normal management responsibilities of a Government agency or a private firm of a comparable size (such as accounting, personnel work, and the like). In determining whether an activity is ‘commercial-industrial’ in nature and ‘can be procured from private enterprise through ordinary business channels,’ reference may be made to the Standard Industrial Classification Manual….” No entry. Circular A-76 (1966) “A Government commercial or industrial activity is one which is operated and managed by an executive agency and which provides for the Government’s own use a product or service that is obtainable from a private source.” No entry. Congressional Research Service 7 Sourcing Policy: Selected Developments and Issues Definition or Description of Commercial Activity Definition or Description of Inherently Governmental Circular A-76 (1967) “A Government commercial or industrial activity is one which is operated and managed by an executive agency and which provides for the Government’s own use a product or service that is obtainable from a private source.” No entry. Circular A-76 (1979) “A ‘Government commercial or industrial activity’ is one which is operated and managed by a Federal executive agency and which provides a product or service that could be obtained from a private source. A representative, but not comprehensive, listing of such activities is provided in Attachment A [of this circular]. An activity can be identified with an organization or a type of work, but must be (1) separable from other functions so as to be suitable for performance either in-house or by contract; and (2) a regularly needed activity of an operational nature, not a one-time activity of short duration associated with support of a particular project.” “A ‘Governmental function’ is a function which must be performed inhouse due to a special relationship in executing governmental responsibilities. Such governmental functions can fall into several categories: (1) Discretionary application of Government authority…. (2) Monetary transactions and entitlements…. (3) Inhouse core capabilities.”a Circular A-76 (1983) A commercial activity is one which is operated by a Federal executive agency and which provides a product or service which could be obtained from a commercial source. A commercial activity is not a Governmental function. A representative list of such activities is provided in Attachment A [of this circular]. A commercial activity also may be part of an organization or a type of work that is separable from other functions or activities and is suitable for performance by contract.” “A Governmental function is a function which is so intimately related to the public interest as to mandate performance by Government employees. These functions include those activities which require either the exercise of discretion in applying Government authority or the use of value judgment in making decisions for the Government. Services or products in support of Governmental functions, such as those listed in Attachment A [of this circular] are commercial activities and are normally subject to this Circular. Governmental functions normally fall into two categories: 1) The act of governing…. (2) Monetary transactions and entitlements….” Document (year) Congressional Research Service 8 Sourcing Policy: Selected Developments and Issues Document (year) Definition or Description of Commercial Activity Definition or Description of Inherently Governmental OFPP Policy Letter 92-1 (1992) No entry. “As a matter of policy, an ‘inherently governmental function’ is a function that is so intimately related to the public interest as to mandate performance by Government employees. These functions include those activities that require either the exercise of discretion in applying Government authority or the making of value judgments in making decisions for the Government. Governmental functions normally fall into two categories: (1) the act of governing, i.e., the discretionary exercise of Government authority, and (2) monetary transactions and entitlements.” P.L. 105-270 (1998)b No entry. “The term ‘inherently governmental function’ means a function that is so intimately related to the public interest as to require performance by Federal Government employees…. The term includes activities that require either the exercise of discretion in applying Federal Government authority or the making of value judgments in making decisions for the Federal Government, including judgments relating to monetary transactions and entitlements.” Circular A-76 (1999) “A commercial activity is one which is operated by a Federal executive agency and which provides a product or service that could be obtained from a commercial source. Activities that meet the definition of an inherently Governmental function provided below [in this circular] are not commercial activities…. A commercial activity also may be part of an organization or a type of work that is separable from other functions or activities is suitable for performance by contract.” “An inherently Governmental function is a function which is so intimately related to the public interest as to mandate performance by Government employees. Consistent with the definitions provided in the Federal Activities Inventory Reform Act of 1998 [P.L. 105-270] and OFPP Policy Letter 92-1, these functions include those activities which require either the exercise of discretion in applying Government authority or the use of value judgments in making decisions for the Government. Services or products in support of inherently Governmental functions, such as those listed in Attachment A [of this circular], are commercial activities and are normally subject to this Circular. Inherently Governmental functions normally fall into two categories: (1) The act of governing…. (2) Monetary transactions and entitlements….” 48 CFR §2.101(b) (2001)c No entry. “Inherently governmental function means, as a matter of policy, a function that is so intimately related Congressional Research Service 9 Sourcing Policy: Selected Developments and Issues Document (year) Definition or Description of Commercial Activity Definition or Description of Inherently Governmental to the public interest as to mandate performance by Government employees. This definition is a policy determination, not a legal determination. An inherently governmental function includes activities that require either the exercise of discretion in applying Government authority, or the making of value judgments in making decisions for the Government. Governmental functions normally fall into two categories: the act of governing, i.e., the discretionary exercise of Government authority, and monetary transactions and entitlements.” Circular A-76 (2003) “A commercial activity is a recurring service that could be performed by the private sector and is resourced, performed, and controlled by the agency through performance by government personnel, a contract, or a fee-for-service agreement. A commercial activity is not so intimately related to the public interest as to mandate performance by government personnel. Commercial activities may be found within, or throughout, organizations that perform inherently governmental activities or classified work.” “An inherently governmental activity is an activity that is so intimately related to the public interest as to mandate performance by government personnel. These activities require the exercise of substantial discretion in applying government authority and/or in making decisions for the government. Inherently governmental activities normally fall into two categories: the exercise of sovereign government authority or the establishment of procedures and process related to the oversight to monetary transactions or entitlements.” Sources: U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 55-4, January 15, 1955, p. 2; U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 57-7, February 5, 1957, p. 1; U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 60-2, September 21, 1959, p. 1 (underlining in original); U.S. Bureau of the Budget, “Policies for Acquiring Commercial or Industrial Products and Services for Government Use,” Circular No. A-76, March 3, 1966, p. 1 (underlining in original); U.S. Bureau of the Budget, “Policies for Acquiring Commercial or Industrial Products and Services for Government Use,” Circular No. A-76 (Revised), August 30, 1967, p. 1 (underlining in original); U.S. Office of Management and Budget, “Acquiring of Commercial or Industrial Products and Services Needed by the Government; Policy Revision,” 44 Federal Register 20558, April 5, 1979 (This is the March 29, 1979 revision of Circular A-76.) (italics in original); U.S. Office of Management and Budget, “Issuance of OMB Circular No. A-76 (Revised) ‘Performance of Commercial Activities’,” 48 Federal Register 37114, August 16, 1983 (This is the August 4, 1983 revision of Circular A-76.) (italics in original); Office of Federal Procurement Policy, “Inherently Governmental Functions,” Policy Letter 92-1, September 23, 1992, p. 2, at http://www.whitehouse.gov/omb/procurement_policy_letter_9201/; 48 CFR §2.101(a) (italics in original); §5(2)(A) and (B) of P.L. 105-270; U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76, August 4, 1983 (Revised 1999), pp. 2-3 (underlining in original); U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, pp. A-2-A-3, at http://www.whitehouse.gov/sites/default/files/omb/ assets/omb/circulars/a076/a76_incl_tech_correction.pdf; 48 CFR §2.101(b). Notes: a. The full description of the third category is as follows: “(3) In-house core capabilities in the area of research, development, and testing, needed for technical analysis and evaluation and technology base management and Congressional Research Service 10 Sourcing Policy: Selected Developments and Issues maintenance. However, requirements for such services beyond the core capability which has been established and justified by the agency are not considered governmental functions.” (U.S. Office of Management and Budget, “Acquiring of Commercial or Industrial Products and Services Needed by the Government; Policy Revision,” 44 Federal Register 20558, April 5, 1979 (This is the March 29, 1979 revision of Circular A-76.) (Italics in original.) b. P.L. 105-270 is the Federal Activities Inventory Reform (FAIR) Act. c. See also Subpart 7.5, “Inherently Governmental Functions,” of Title 48 of the Code of Federal Regulations for, among other things, “a list of examples of functions considered to be inherently governmental functions or which shall be treated as such.” (48 CFR §7.503(c).) The Role of the Private Sector Governmental reliance on businesses for the provision of goods and services has a long history in the United States and pre-dates the ratification of the Constitution and the establishment of the nation. The colonies relied on merchants, farmers, and craftsmen for supplying their troops during the French and Indian War and the Revolutionary War.27 The federal government’s written policy of relying on the private sector for the provision of goods and services has its origins in three Bureau of the Budget bulletins issued in the 1950s. OMB Circular A-76, first published in 1966 and revised several times over the years, continues this policy.28 Most of these documents also identify, or describe, circumstances under which federal employee performance of commercial functions was, or is, permitted. Table 2 contains excerpts from the three bulletins, the original Circular A-76, and all of the revised versions of Circular A-76. Table 2. Policy History of Governmental Reliance on the Private Sector Bureau of the Budget Bulletins and OMB Circular A-76 Document (date) Bureau of the Budget Bulletin No. 55-4 (January 15, 1955) Policy Statementa Circumstances Under Which Government Performance of a Commercial Function May Be Permittedb The “Federal Government will not start or carry on any commercial activity to provide a service or product for its own use if such product or service can be procured from private enterprise through An agency head may authorize an exception to this policy “only where it is clearly demonstrated in each case that it is not in the public interest to procure such product or service from private enterprise.”c 27 James F. Nagle, History of Government Contracting (Washington, DC: George Washington University, 1999), pp. 12 and 16. 28 An excerpt from a 1962 report to President John F. Kennedy presents another perspective on the relationship between the federal government and contractors. The Bell Report, which was named for the Director of the Bureau of the Budget, David Bell, “(1) declared that reliance on contractors and grantees ‘blurred the traditional dividing line between the private and public sectors of our Nation’; (2) deemed it ‘axiomatic’ that government officials (i.e., civil and special services and appointees) must do the work and maintain the competence required to account for all government work; and (3) warned that, without corrective action, a brain drain into the contractor workforce would result.” (Report to the President on Government Contracting for Research and Development (Bell Report), in Systems Development and Management: Hearings Before a Subcommittee of the Committee on Government Operations, House of Representatives, 87th Congress, 191-263 app. I (1962), cited in Dan Guttman, “Governance by Contract: Constitutional Visions; Time for Reflection and Choice,” Public Contract Law Journal, vol. 33, no. 2 (Winter 2004), p. 327. Congressional Research Service 11 Sourcing Policy: Selected Developments and Issues Document (date) Policy Statementa Circumstances Under Which Government Performance of a Commercial Function May Be Permittedb ordinary business channels.” Bureau of the Budget Bulletin No. 57-7 (February 5, 1957) Same as BOB No. 55-4. Same as BOB No. 55-4. Bureau of the Budget Bulletin No. 60-2 (September 21, 1959) Same as BOB No. 55-4. “Compelling reasons for exceptions to the general policy include national security; relatively large and disproportionately higher costs; and clear unfeasibility.”e Bureau of the Budget Circular A76 (March 3, 1966) “The guidelines in this Circular are in furtherance of the Government’s general policy of relying on the private enterprise system to supply its needs.” “Because the private enterprise system is basic to the American economy, the general policy establishes a presumption in favor of Government procurement from commercial sources.”d “A Government commercial or industrial activity may be authorized only under one or more of the following conditions: a. Procurement of a product or service from a commercial source would disrupt or materially delay an agency’s program…. b. It is necessary for the Government to conduct a commercial or industrial activity for purposes of combat support or for individual and unit retraining of military personnel or to maintain or strengthen mobilization readiness. c. A satisfactory commercial source is not available and cannot be developed in time to provide a product or service when it is needed…. d. The product or service is available from another Federal agency…. e. Procurement of the product or services from a commercial source will result in higher cost to the Government….” “In some instances, … it is in the national interest for the Government to provide directly the products and services it uses.” Bureau of the Budget Circular A76 (August 30, 1967) Same as the March 3, 1966, circular. Same as the March 3, 1966, circular. Office of Management and Budget Circular A-76 (March 29, 1979) “In a democratic free enterprise economic system, the Government should not compete with its citizens. The private enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the Government to rely on competitive private enterprise to “No Satisfactory Commercial Source Available…. National Defense…. Higher Cost.”f Congressional Research Service 12 Sourcing Policy: Selected Developments and Issues Document (date) Policy Statementa Circumstances Under Which Government Performance of a Commercial Function May Be Permittedb supply the products and services it needs.” “This policy builds on three equally valid policy precepts: a. Rely on the Private Sector. The Government’s business is not to be in business. Where private sources are available, they should be looked to first to provide the commercial or industrial goods and services needed by the Government to act on the public’s behalf. b. Retain Certain Governmental Functions In-House. Certain functions are inherently governmental in nature, being so intimately related to the public interest as to mandate performance by Federal employees. c. Aim for Economy; Cost Comparisons. When private performance is feasible and no overriding factors require inhouse performance, the American people deserve and expect the most economical performance and, therefore, rigorous comparison of contract costs versus in-house costs should be used, when appropriate, to decide how the work will be done.”f Office of Management and Budget Circular A-76 (August 4, 1983) “In the process of governing, the Government should not compete with its citizens. The competitive enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the Government to rely on commercial sources to supply the products and services the Government needs.” “a. No Satisfactory Commercial Source Available…. b. National Defense…. c. Patient Care…. d. Lower cost.”g “It is the policy of the United States Government to: a. Achieve Economy and Enhance Productivity. Competition enhances quality, economy, and productivity. Whenever commercial sector performance of a Government operated commercial activity is permissible, in accordance with this Circular and its Supplement, comparison of the cost of contracting and the cost of in-house performance shall be performed to determine who will do the work. b. Retain Governmental Functions In-House. Certain functions are inherently Congressional Research Service 13 Sourcing Policy: Selected Developments and Issues Document (date) Policy Statementa Circumstances Under Which Government Performance of a Commercial Function May Be Permittedb Governmental in nature, being so intimately related to the public interest as to mandate performance only by Federal employees. These functions are not in competition with the commercial sector. Therefore, these functions shall be performed by Government employees. c. Rely on the Commercial Sector. The Federal Government shall rely on commercially available sources to provide commercial products and services. In accordance with the provisions of this Circular, the Government shall not start or carry on any activity to provide a commercial product or service if the product or service can be procured more economically from a commercial source.”f Office of Management and Budget Circular A-76 (August 4, 1983 (revised 1999))h Same as August 4, 1983 circular.i Same as August 4, 1983 circular. Commercial Activities Panel,j Improving the Sourcing Decision of the Government, Final Report (April 2002) Not applicable. “It is clear that government workers need to perform certain warfighting, judicial, enforcement, regulatory, and policymaking functions, and the government may need to retain an inhouse capability even in functions that are largely outsourced. Certain other capabilities, such as adequate acquisition skills to manage costs, quality, and performance and to be smart buyers of products and services, or other competencies such as those directly linked to national security, also must be retained inhouse to help ensure effective mission execution.” Office of Management and Budget Circular A-76 (May 29, 2003) “The longstanding policy of the federal government has been to rely on the private sector for needed commercial services. To ensure that the American people receive maximum value for their tax dollars, commercial activities should be subject to the forces of competition.” Although this revision does not identify any circumstances or conditions under which federal employee performance of a commercial function might be permitted, it provides a means for agencies to exempt commercial functions from being subjected to public-private competition.k Sources: U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 55-4, January 15, 1955, p. 1; U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 57-7, February 5, 1957, p. 1; U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 60-2, September 21, 1959, pp. Congressional Research Service 14 Sourcing Policy: Selected Developments and Issues 1-3; U.S. Bureau of the Budget, “Policies for Acquiring Commercial or Industrial Products and Services for Government Use,” Circular No. A-76, March 3, 1966, pp. 1-3; U.S. Bureau of the Budget, “Policies for Acquiring Commercial or Industrial Products and Services for Government Use,” Circular No. A-76 (Revised), August 30, 1967, pp. 1-3; U.S. Office of Management and Budget, “Acquiring of Commercial or Industrial Products and Services Needed by the Government; Policy Revision,” 44 Federal Register 20557-20559, April 5, 1979 (This is the March 29, 1979 revision of Circular A-76.); U.S. Office of Management and Budget, “Issuance of OMB Circular No. A-76 (Revised) ‘Performance of Commercial Activities’,” 48 Federal Register 37114-37115, August 16, 1983 (This is the August 4, 1983 revision of Circular A-76.); U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76, August 4, 1983 (Revised 1999), p. 1; U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a076/a76_incl_tech_correction.pdf; Commercial Activities Panel, Improving the Sourcing Decisions of the Government, Final Report, April 2002, p. 46, at http://archive.gao.gov/f0502/a03209.pdf. Notes: a. If the document includes, in addition to the policy statement, relevant explanatory material, the additional material is included here. b. These are the circumstances identified explicitly in the document. Under the 1966 circular and each revision, federal employees may perform a commercial function if the outcome of the public-private competition indicates that the work should be performed by federal employees. c. When reviewing commercial activities, several rules, including the following, applied: “In determining whether an activity is ‘commercial’ in nature and ‘could be procured … through ordinary business channels,’ reference may be made to ordinary business practice with respect to procurement of services or products. The inclusion of an activity in the manual will be generally considered indicative that it may be procured commercially. There will be excluded from coverage as noncommercial, however, those functions which are a part of the normal management responsibilities of a Government agency or a private business of comparable size (such as accounting, personnel work, and the like).” (U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 55-4, January 15, 1955, p. 2.) d. Although this statement does not appear in the paragraph labeled “Policy,” it reveals the fundamental reason for the presumption in favor of using the private sector to supply the government. e. (1) “There are instances … when for reasons of national security, an activity cannot be turned over to private industry. These activities may include, but are not necessarily limited to, functions which must be performed by Government personnel in order to provide them with vital training and experience for maintaining combat units in readiness….” (2) “Continuation of Government operation on the ground that procurement through commercial sources would involve higher costs may be justified only if the costs are analyzed on a comparable basis and the differences are found to be substantial and disproportionately large….” (3) “Certain products or services may be found to be clearly unfeasible to procure from private enterprise through ordinary business channels due to the fact that the product or service is: (1) An integral function of the basic mission of the agency, or (2) Not available in the particular instance, nor likely to become available commercially in the foreseeable future because of the Government’s unique or highly specialized requirements or geographic isolation of the installation, or (3) Administratively impractical to contract for commercially.” (U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 60-2, September 21, 1959, pp. 2-4.) f. Italics in original. g. Although the 1979 circular uses the term “higher cost” and the 1983 circular uses the term “lower cost,” the meaning, as follows, is the same in both circulars: government performance of a commercial function is authorized if the cost of agency performance is lower than the cost of contractor performance. h. OMB has noted that it was the supplement to Circular A-76—not the circular itself—that was revised in 1999. (U.S. Office of Management and Budget, “Performance of Commercial Activities,” 67 Federal Register 69771, November 19, 2002.) i. There are two differences between the policy statements of the 1983 revision and the 1999 revision. Under the heading Achieve Economy and Enhance Productivity, the 1999 revision includes an additional sentence, which reads as follows: “When conducting cost comparisons, agencies must ensure that all costs are considered and that these costs are realistic and fair.” Under the heading Rely on the Commercial Sector, Congressional Research Service 15 Sourcing Policy: Selected Developments and Issues the 1999 revision includes the following reference to the supplement to Circular A-76: “In accordance with the provisions of this Circular and its Supplement, the Government….” (U.S. Office of Management and Budget, Circular No. A-76, August 4, 1983 (Revised 1999), pp. 1-2.) (Underlining included in original.) j. See “Commercial Activities Panel’s Sourcing Principles” for additional information about the panel. k. Pursuant to the Federal Activities Inventory Reform (FAIR) Act (P.L. 105-270), each agency subject to the statute is required to submit an inventory of its commercial functions to OMB annually. For each function listed, an agency applies the appropriate reason code, which indicates whether the function is eligible or is not eligible for a Circular A-76 competition. Reason code A is used to identify a commercial function that “is not appropriate for private sector performance pursuant to a written determination by the [agency’s] CSO [competitive sourcing official].” Agencies are required to make the written justifications available to OMB and the public if requested to do so. (U.S. Office of Management and Budget, Circular No. A-76 (Revised), May 29, 2003, p. A-3, at http://www.whitehouse.gov/sites/default/files/omb/assets/about_omb/ a76_incl_tech_correction.pdf.) Although either government employees or contractor employees may perform commercial functions, government reliance on the private sector has been the foundation of written sourcing policy, as shown by the material presented in Table 2. Some observers would suggest that contractor performance has been considered the rule while federal employee performance of commercial activities has been treated as an exception. The presumption of, or preference for, contractor performance, they would add, is supported by the following language, which is contained in the policy statement in Circular A-76: A [public-private] competition is not required for private sector performance of a new requirement…. Before government personnel may perform a new requirement, a [publicprivate] competition shall be used to determine whether government personnel should perform the commercial activity.29 In sum, if an agency has a new function (i.e., a new requirement) to perform, it may procure the services of a contractor, in accordance with applicable statutes and the Federal Acquisition Regulation (FAR). If, instead, the agency considers using its employees to perform the work, then it must conduct a public-private competition, which will determine whether federal employees or contractor employees will perform the work. Several of the documents listed in Table 2 provide a similar rationale—the importance of the nation’s private enterprise system—for government reliance on the private sector. BOB Bulletin 60-2 states that, “[b]ecause the private enterprise system is basic to the American economy, the general policy establishes a presumption in favor of Government procurement from commercial sources.”30 Circular A-76 (1979 revision) echoed the theme found in Bulletin 60-2, stating that the private sector “is the primary source of national economic strength.”31 The same reference to 29 U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, p. 2. (Italics added to aid in identifying relevant language.) A new requirement is an “agency’s newly established need for a commercial product or service that is not performed by (1) the agency with government personnel; (2) a fee-for-service agreement with a public reimbursable source; or (3) a contract with the private sector. An activity that is performed by the agency and is reengineered, reorganized, modernized, upgraded, expanded, or changed to become more efficient, but still essentially provides the same service, is not considered a new requirement. New ways of performing existing work are not new requirements.” (Ibid., pp. D-6-D-7.) 30 U.S. Bureau of the Budget, “Commercial-Industrial Activities of the Government Providing Products or Services for Governmental Use,” Bulletin No. 60-2, September 21, 1959, p. 1. 31 U.S. Office of Management and Budget, “Acquiring of Commercial or Industrial Products and Services Needed by the Government; Policy Revision,” 44 Federal Register 20557-20558, April 5, 1979 (This is the March 29, 1979, revision of Circular A-76.) Congressional Research Service 16 Sourcing Policy: Selected Developments and Issues the importance of the private sector also appeared in the 1983 and 199932 revisions of Circular A76. The 2003 revision to Circular A-76 does not include a rationale for relying on the private sector, but it does acknowledge that reliance on the private sector for commercial services has been the longstanding policy of the federal government. At the time this revision was published, OMB offered the following explanation regarding the absence of a statement about governmental reliance on the private sector: Deletion of the “reliance” statement from the revised Circular is not intended to denigrate this contribution.33 Nor does this action signal a retreat from the Administration’s commitment to a market-based government that is unafraid of competition, innovation, and choice. The deletion is simply meant to avoid a presumption that the government should not compete for work to meet its own needs. Such a suggestion conflicts with the Circular’s main function of providing policies and procedures to determine the best service provider— irrespective of the sector the provider represents.34 The justification for competitive sourcing found in the 2003 revision is based partly on market ideology and partly on financial considerations. It states, “To ensure that the American people receive maximum value for their tax dollars, [agencies’] commercial activities should be subject to the forces of competition.”35 Despite this difference from statements in previous versions of Circular A-76, the presumption in favor of private sector performance of commercial activities and a belief in the importance of the private sector as a rationale for competitive sourcing remain, at least for some. Two similar bills introduced during the 112th Congress, H.R. 1474 and S. 785, appear to reflect this perspective. H.R. 1474, Freedom from Government Competition Act of 2011, states, in part, the following: In the process of governing, the Federal Government should not compete with its citizens. The competitive enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the Federal Government—(1) to rely on commercial sources to supply the products and services the Government needs; (2) to refrain from providing a product or service if the product or service can be procured more economically from a commercial sources; and (3) to utilize Federal employees to perform inherently governmental functions….36 The material in Table 2 also shows that, with the exception of the 2003 circular, sourcing policy documents acknowledged the need for, and permitted, exceptions to the policy of governmental reliance on the private sector for the provision of commercial goods and services. Among the reasons cited for permitting exceptions are national security, public interest, cost, disruption to an 32 The 1999 version may not be referred to as such. The title page of the 1999 version includes the following: “(August 4, 1983 (revised 1999)).” 33 The words “this contribution” refers to the following statement by OMB: “Without the private sector, the government would not be able to meet the many needs of our citizenry.” (U.S. Office of Management and Budget, “Performance of Commercial Activities,” 68 Federal Register 32136, May 29, 2003.) 34 Ibid. 35 U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, p. 1. 36 Section 4(a) of H.R. 1474 (112th Congress). Congressional Research Service 17 Sourcing Policy: Selected Developments and Issues agency’s program. Particular functions singled out for federal employee performance were combat support, patient care, and national defense. For its part, the Commercial Activities Panel (CAP) noted that federal employees need to perform “certain warfighting, judicial, enforcement, regulatory, … policymaking …” and acquisition functions.37 Thus, while governmental reliance on the private sector has been embedded in written sourcing policy since the 1950s, so, too, has the acknowledgment (and associated exemptions) that, under certain circumstances, federal employee performance of commercial activities may be preferable to contractor performance. Recent Developments in the History of Sourcing Policy Competitive Sourcing The historically predominant strain of sourcing policy—which focuses on governmental reliance on the private sector, Circular A-76, and public-private competitions38—was designated one of the components of President George W. Bush’s President’s Management Agenda (PMA), and, as such, was named competitive sourcing.39 The Administration viewed competitive sourcing as “the process of opening the government’s commercial activities to the discipline of competition”40 and envisioned that “[o]pening Government functions to competition to the fullest extent possible is the best way to ensure market-based pricing and encourage innovation….”41 The Administration’s plans for competitive sourcing included “[e]xpanding [the number of] A-76 competitions.”42 To that end, in early 2001, the Office of Management and Budget directed agencies to conduct public-private competitions, or direct conversions,43 for at least 5% of the full-time equivalents44 37 Commercial Activities Panel, Improving the Sourcing Decisions of the Government, Final Report, April 2002, p. 46, at http://archive.gao.gov/f0502/a03209.pdf. For more information about the panel, see “Commercial Activities Panel’s Sourcing Principles.” 38 Generally, public-private competitions have involved subjecting an agency’s commercial activity to a competition, the outcome of which will determine whether agency employees continue to perform the work, or a contractor will take over the function (for the duration of the contract awarded by the agency). 39 An example of the focus on competing agencies’ functions (commercial activities) may be found in a statutory provision that authorized the establishment of the Commercial Activities Panel (CAP). Convened by the Comptroller General pursuant to Section 832 of P.L. 106-398, Floyd D. Spence National Defense Authorization Act of FY2001, the Commercial Activities Panel was directed “to study the policies and procedures governing the transfer of commercial activities for the Federal Government from Government personnel to a Federal contractor….” (§832(a) of P.L. 106398.) 40 U.S. Office of Management and Budget, “Performance of Commercial Activities,” 67 Federal Register 69772, November 19, 2002, at http://www.gpo.gov/fdsys/pkg/FR-2002-11-19/pdf/02-29472.pdf. OMB’s reports on competitive sourcing touted the net savings, cost avoidance, and performance improvements that resulted from publicprivate competitions. (For example, see U.S. Office of Management and Budget, Report on Competitive Sourcing Results, Fiscal Year 2006, May 2007, at http://www.whitehouse.gov/sites/default/files/omb/assets/procurement/ cs_report_fy2006.pdf.) 41 Executive Office of the President, A Blueprint for New Beginnings, A Responsible Budget for America’s Priorities (Washington: GPO, 2001), p. 181, at http://www.gpoaccess.gov/usbudget/fy02/pdf/blueprnt.pdf. 42 Mitchell E. Daniels, Jr., Director, U.S. Office of Management and Budget, “Performance Goals and Management Initiatives for the FY2002 Budget,” memorandum M-01-11, February 14, 2001, p. 1 (attachment), at http://www.whitehouse.gov/omb/memoranda_m01-11/. 43 Some Circular A-76 revisions issued prior to 2003 permitted an agency to convert a commercial activity with 10 or fewer full-time equivalents to contract, in-house, or interservice support agreement performance without conducting a (continued...) Congressional Research Service 18 Sourcing Policy: Selected Developments and Issues [FTEs] listed on their commercial activities inventories in FY2002.45 At the same time, OMB noted that the President was committed to subjecting “at least one-half of the Federal positions [FTEs] listed” on FAIR Act inventories to public-private competitions.46 A little over two years later, the Administration dropped its government-wide competitive sourcing goals in favor of agency-specific targets, according to the head of the Office of Federal Procurement Policy.47 The PMA included a scorecard for tracking each agency’s progress on the PMA initiatives. In December 2003, for example, OMB described the criteria an agency was required to fulfill in order to receive a “green” rating for competitive sourcing. “An agency will earn a ‘green’ status when it has: • an OMB approved ‘green’ competition plan to compete commercial activities available for competition • publicly announced standard competitions in accordance with the schedule outlined in the agency ‘green’ competition plan • since January 2001, completed at least 10 competitions (no minimum number of positions required per competition) • in the past year, completed 90% of all standard competitions in a 12-month time frame • in the past year, completed 95% of all streamlined competitions in a 90-day timeframe • in the past year, canceled fewer than 10% of publicly announced standard and streamlined competitions • OMB-approved justifications for all categories of commercial activities exempt from competition.”48 (...continued) public-private competition. (U.S. Office of Management and Budget, Circular No. A-76 Revised Supplemental Handbook, Performance of Commercial Activities, March 1996, p. 4, at http://www.whitehouse.gov/sites/default/files/ omb/assets/agencyinformation_circulars_procurement_pdf/a076supp.pdf.) 44 A full-time equivalent is “[t]he staffing of Federal civilian employee positions, expressed in terms of annual productive work hours (1,776)....” (U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, p. D-5.) 45 Sean O’Keefe, Deputy Director, U.S. Office of Management and Budget, “Performance Goals and Management Initiatives for the FY2002 Budget,” memorandum M-01-15, March 9, 2001, p. 1, at http://www.idmanagement.gov/ smartcard/information/m01-15.pdf. The Bush Administration’s competitive sourcing targets may have been only the second time an Administration imposed targets, or goals, for conducting public-private competitions. In Executive Order 12615, President Ronald Reagan required agencies, beginning in FY1989, to “conduct annual studies [competitions] of not less than 3 percent of the department or agency’s total civilian population, until all identified potential commercial activities have been studied.” (Executive Order 12615, “Performance of Commercial Activities,” 52 Federal Register 44853, November 23, 1987.) 46 O’Keefe, “Performance Goals and Management Initiatives for the FY2002 Budget,” p. 1. 47 U.S. Congress, Senate Committee on Governmental Affairs, Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, Then and Now: An Update on the Bush Administration’s Competitive Sourcing Initiative, 108th Cong., 1st sess., July 24, 2003, S.Hrg. 108-244 (Washington: GPO, 2004), p. 61. 48 Clay Johnson III, Deputy Director for Management, U.S. Office of Management and Budget, “Development of (continued...) Congressional Research Service 19 Sourcing Policy: Selected Developments and Issues As mentioned above, whereas the FAIR Act only required agencies to submit inventories of their commercial activities to OMB, the Bush Administration imposed a similar requirement regarding inherently governmental functions. An OMB memorandum dated April 3, 2001, requested agencies to submit a report that listed their inherently governmental positions when they submitted their FAIR Act commercial activities inventories.49 This requirement continued throughout the Bush Administration.50 In a major undertaking, OMB completed a revision of Circular A-76 in 2003. The result is a circular that includes, for example, the inventory process for commercial activities and inherently governmental functions; two types of competitions (standard and streamlined);51 and a provision allowing the use of negotiated contracting, such as a lowest price technically acceptable source selection, or tradeoff source selection process under certain circumstances.52 Another change was the exclusion of language that had appeared in the 1999 circular that had explicitly permitted government performance of national defense and patient care commercial activities, and in circumstances where a satisfactory commercial source was not available. A comprehensive summary of changes made to the circular may be found in the Federal Register notice that accompanied the publication of the 2003 revision.53 Some commentators might suggest that the Bush Administration did not support the possibility that work performed by a contractor could be subjected to public-private competition. Section 842(b) of H.R. 3058, which was enacted as P.L. 109-115, Transportation, Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, and Independent Agencies Appropriations Act for FY2006, directed that Circular A-76 contain procedures for subjecting activities performed by contractors to public-private competitions (with the possibility that a competition could result in insourcing). 54 The text of Section 842(b) is as follows: (...continued) ‘Green’ Plans for Competitive Sourcing,” memorandum, December 22, 2003, p. 3 (Attachment B), at http://www.whitehouse.gov/sites/default/files/omb/procurement/comp_sourc-green_plans122203.pdf. 49 O’Keefe, “Year 2001 Inventory of Commercial Activities,” p.1. 50 For example, see Angela B. Styles, Administrator, Office of Federal Procurement Policy, “Year 2002 Inventory of Commercial Activities,” memorandum M-02-04, February 27, 2002, pp. 1-2, at http://www.whitehouse.gov/sites/ default/files/omb/memoranda/m02-04.pdf; Angela B. Styles, Administrator, Office of Federal Procurement Policy, “Year 2003 Inventories of Commercial and Inherently Governmental Activities,” memorandum M-03-09, March 14, 2003, p. 1, at http://www.whitehouse.gov/omb/memoranda_m03-09/; Clay Johnson III, Deputy Director for Management, U.S. Office of Management and Budget, “2004 Inventories of Commercial and Inherently Governmental Activities,” memorandum M-04-09, April 6, 2004, p. 1, at http://georgewbush-whitehouse.archives.gov/omb/ memoranda/fy04/m04-09.pdf; Paul A. Denett, Administrator, Office of Federal Procurement Policy, “2007 Inventories of Commercial and Inherently Governmental Activities,” memorandum M-07-14, May 3, 2007, p. 1, at http://georgewbush-whitehouse.archives.gov/omb/memoranda/fy2007/m07-14.pdf. 51 If a commercial activity has 65 or fewer full-time equivalents (FTEs), the agency may use either a streamlined competition, or a standard competition. If a commercial activity has more than 65 FTEs, the agency is required to use a standard competition. (U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (revised), May 29, 2003, p. B-1.) 52 Generally, prior to the 2003 revision, source selection decisions were made on the basis of cost. The 2003 revision permits, for example, the use of lowest price technically acceptable source selection, which means the “performance decision shall be based on the lowest cost of all offers and [agency] tenders determined to be technically acceptable,” or the tradeoff source selection process (under certain circumstances) when an agency “wishes to consider” non-cost, or non-price, factors, in addition to cost, or price, when making a source selection decision. (Ibid., pp. B-13-B-14.) 53 See U.S. Office of Management and Budget, “Performance of Commercial Activities,” May 29, 2003, pp. 3213432142. 54 Unlike other terms common to sourcing policy, such as inherently governmental and commercial, it appears that (continued...) Congressional Research Service 20 Sourcing Policy: Selected Developments and Issues Nothing in Office of Management and Budget Circular A-76 shall prevent the head of an executive agency from conducting a public-private competition to evaluate the benefits of converting work from contract performance to performance by Federal employees in appropriate instances. The Circular shall provide procedures and policies for these competitions that are similar to those applied to competitions that may result in the conversion of work from performance by Federal employees to performance by a contractor. The Bush Administration’s response to this provision provides some insight into its views on the matter. As reported in a 2005 Federal Times article, an OMB official at the time offered the following comments: “‘We believe the insourcing language [in H.R. 3058, which was enacted as P.L. 109-115] is unnecessary…. We will continue to provide for fair and reasonable processes for agencies to consider insourcing when it can benefit taxpayers…. However we have no plans to alter the focus of the competitive sourcing initiative to emphasize insourcing.’”55 No changes were made to Circular A-76 following the enactment of H.R. 3058. Commercial Activities Panel’s Sourcing Principles In early 2001, during the same period that the Bush Administration launched its competitive sourcing initiative, the Comptroller General, as directed by statute, convened what came to be called the Commercial Activities Panel (CAP). The panel included, among others, the Administrator of OFPP, the Director of the Office of Personnel Management (OPM), the Under Secretary of Defense for Acquisition, Technology and Logistics, and the heads of the American Federation of Government Employees and the National Treasury Employees Union.56 Section 832 of P.L. 106-398, Floyd D. Spence National Defense Authorization Act of FY2001, tasked the panel with “study[ing] the policies and procedures governing the transfer of commercial activities for the Federal Government from Government personnel to a Federal contractor” and producing a report on the results of its study. In addition to addressing these policies and procedures, the panel developed “a set of principles that it believes should guide sourcing policy.”57 The Panel believes that federal sourcing policy should: 1. Support agency missions, goals, and objectives. 2. Be consistent with human capital practices designed to attract, motivate, retain, and reward a high performing federal workforce. 3. Recognize that inherently governmental and certain other functions should be performed by federal workers. (...continued) there is no governmentwide definition of insourcing. Fundamentally, to insource a function is to shift work that is being performed, or has been performed, by a contractor to a federal agency. 55 Tichakorn Hill, “OMB Rebuffs Provision to Bring Contracted Work Back In House,” Federal Times.com, July 27, 2005. (This article is no longer available from the Federal Times website.) 56 For a complete list of members of the panel, see the final report, at http://archive.gao.gov/f0502/a03209.pdf. 57 Commercial Activities Panel, Improving the Sourcing Decisions of the Government, p. 33. Congressional Research Service 21 Sourcing Policy: Selected Developments and Issues 4. Create incentives and processes to foster high-performing, efficient, and effective organizations throughout the federal government. 5. Be based on a clear, transparent, and consistently applied process. 6. Avoid arbitrary full-time equivalent (FTE) or other arbitrary numerical goals. 7. Establish a process that, for activities that may be performed by either the public or the private sector, would permit public and private sources to participate in competitions for work currently performed in-house, work currently contracted to the private sector, and new work, consistent with these guiding principles. 8. Ensure that, when competitions are held, they are conducted as fairly, effectively, and efficiently as possible. 9. Ensure that competitions involve a process that considers both quality and cost factors. 10. Provide for accountability in connection with all sourcing decisions.58 Statutory Requirement for Agencies to Develop Insourcing Guidelines Whereas competitive sourcing was a hallmark of the Bush Administration and component of the President’s Management Agenda, his successor’s first year in office saw the enactment of a provision involving insourcing. This was a significant development since, as indicated above, the Bush Administration did not appear to support the possibility that work performed by a contractor could, or should, be insourced. Pursuant to Section 736 (Division D) of P.L. 111-8, Omnibus Appropriations Act for FY2009, civilian agencies are required to draft and implement their own insourcing guidelines and procedures. Section 736 (Division D) of P.L. 111-8,59 amends Section 739 (Division D) of P.L. 110-161, Consolidated Appropriations Act of FY2008. To aid in tracking the changes effected by Section 736, which struck Section 739(b) and inserted new language, the following convention is used in this report: Section 739(b) of P.L. 110-161, as amended. The following is a summary of Section 739, as amended. General Consideration of Federal Employee Performance Each agency’s guidelines are to include instructions or procedures that ensure that consideration is given, on a regular basis, to using federal employees to perform new functions and functions being performed by contractor employees that could be performed by agency employees.60 58 Ibid., pp. 6-9. This provision does not apply to the Department of Defense (DOD). (Section 739(b)(6) of P.L. 110-161, as amended.) Section 324 of P.L. 110-181, National Defense Authorization Act for FY2008, added Section 2463 to Title 10 of the U.S. Code, which requires the Under Secretary of Defense for Personnel and Readiness to develop and implement insourcing guidelines. 60 Section 739(b)(1) of P.L. 110-161, as amended. 59 Congressional Research Service 22 Sourcing Policy: Selected Developments and Issues Special Consideration of Federal Employee Performance As part of their insourcing guidelines, agencies are required to include guidance and procedures for providing special consideration to using agency employees to perform certain types of functions.61 This list includes any function that 1. is being performed by a contractor and that has been performed at any time by government employees within the past 10 years; 2. is closely associated with the performance of an inherently governmental function; 3. “has been performed pursuant to a contract awarded on a non-competitive basis”; or 4. using criteria specified in this provision, has been performed poorly.62 An agency is to give special consideration to using federal employees for any new requirement, and particularly for a new requirement that is closely associated with an inherently governmental function, or is similar to an activity that federal employees performed previously.63 Precluding Public-Private Competition under Certain Circumstances Although Section 739(b)(3) of P.L. 110-161, as amended, does not address insourcing directly or explicitly, it does involve federal employee performance of agency functions. This provision prohibits conducting a public-private competition before the agency (1) “assign[s] the performance of [a new agency] function to Federal employees”; (2) “convert[s] [any agency function where special consideration was given to using federal employees] to performance by Federal employees”; or, (3) “expand[s] the scope of [a] function” performed by federal employees.64 Deadline for Agencies Agencies were required to implement their guidelines and procedures within 120 days after the date of enactment of Section 736 (Division D) of P.L. 111-8.65 (The date of enactment was March 11, 2009.) The Government Accountability Office (GAO) reported that, as of July 9, 2009, none of the nine civilian agencies it had visited had finalized their guidelines.66 Among the reasons agencies gave for not meeting the deadline were that they had been waiting for OMB to issue 61 A statutory provision precludes agencies from subjecting agency functions to public-private competition under certain circumstances. An agency “may not conduct a public-private competition under … Circular A-76 or any other provision of law or regulation before—(A) in the case of a new agency function, assigning the performance of the function to Federal employees; (B) in the case of any agency function described in [§739(b)(2)], converting the function to performance by Federal employees; or (C) in the case of an agency function performed by Federal employees, expanding the scope of the function.” (Section 739(b)(3) of P.L. 110-161, as amended.) 62 Section 739(b)(2)(A) of P.L. 110-161, as amended. 63 Section 739(b)(2)(B) of P.L. 110-161, as amended. 64 Section 739(b)(3) of P.L. 110-161, as amended. 65 Section 739(b)(4) of P.L. 110-161, as amended. 66 U.S. Government Accountability Office, Civilian Agencies’ Development and Implementation of Insourcing Guidelines, p. 6. Congressional Research Service 23 Sourcing Policy: Selected Developments and Issues insourcing guidance (which occurred in July 2009), or they did not have sufficient capacity to address “multiple management initiatives” while also performing their regular duties.67 OMB Memorandum on Multi-Sector Workforce Management With the release of an OMB memorandum, in July 2009, regarding the multi-sector workforce, the Obama Administration initiated a systematic effort to develop policy and guidance for managing a workforce that consists of both federal employees and government contractors.68 Recognizing that each sector’s workforce contributes to the work of the federal government, OMB advised that “[c]urrent policies and practices must be improved so that agencies consistently identify the proper role of each sector and achieve the best mix of public and private labor resources to serve the American people.”69 This approach, which focuses on the appropriate composition of the government’s multi-sector workforce, marks a significant change from an emphasis on competitive sourcing. Of particular concern to the Administration, and others, was the possibility that contractor employees might be performing inherently governmental work. Inherently governmental functions are reserved for performance by federal employees. President Barack Obama summarized the issue, as follows, in his March 2009 memorandum on government contracting: Government outsourcing for services also raises special concerns. For decades, the Federal Government has relied on the private sector for necessary commercial services used by the Government, such as transportation, food, and maintenance. Office of Management and Budget Circular A-76, first issued in 1966, was based on the reasonable premise that while inherently governmental activities should be performed by Government employees, taxpayers may receive more value for their dollars if non-inherently governmental activities that can be provided commercially are subject to the forces of competition. However, the line between inherently governmental activities that should not be outsourced and commercial activities that may be subject to private sector competition has been blurred and inadequately defined. As a result, contractors may be performing inherently governmental functions. Agencies and departments must operate under clear rules prescribing when outsourcing is and is not appropriate.70 Concerns regarding the proper role of contractors, or, alternatively, concerns regarding the ability of agencies to retain control over their operations, including the performance of inherently 67 Ibid., pp. 6-7. OMB required each agency subject to its July 29, 2009, memorandum on the multi-sector workforce to “[c]onduct a pilot human capital analysis of at least one program, project, or activity, where the agency has concerns about the extent of reliance on contractors.” (Orszag, “Managing the Multi-Sector Workforce,” p. 2.) 68 The memorandum is available at http://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_fy2009/m09-26.pdf. 69 Orszag, “Managing the Multi-Sector Workforce,” p. 1. 70 President Barack Obama, “Government Contracting,” memorandum, March 4, 2009, p. 2, at http://www.whitehouse.gov/the_press_office/Memorandum-for-the-Heads-of-Executive-Departments-and-AgenciesSubject-Government. In a July 2009 memorandum, the Director of OMB expanded on President Obama’s comments: “In particular, overreliance on contractors can lead to the erosion of the in-house capacity that is essential to effective government performance. Such overreliance has been encouraged by one-sided management priorities that have publicly rewarded agencies for becoming experts in identifying functions to outsource and have ignored the costs stemming from loss of institutional knowledge and capability and from inadequate management of contracted activities.” (Orszag, “Managing the Multi-Sector Workforce,” p. 1.) Congressional Research Service 24 Sourcing Policy: Selected Developments and Issues governmental functions, were raised previously by the Acquisition Advisory Panel.71 In its final report, the panel summarized the issue as follows: … [A]lthough federal law prohibits contracting for activities and functions that are inherently governmental, uncertainty about the proper scope and application of this term has led to confusion, particularly with respect to service contracting outside the ambit of OMB Circular A-76. Moreover, as the federal workforce shrinks, there is a need to assure that agencies have sufficient in-house expertise and experience to perform critical functions, make critical decisions, and manage the performance of their contractors.72 In its memorandum, OMB required agencies (1) to develop a framework for managing the multisector workforce; (2) conduct “a pilot human capital analysis”; and (3) comply with OMB guidance in developing their insourcing guidelines and procedures. The following subsections contain summaries of these three requirements. Later guidance found in OFPP’s Policy Letter 11-01, which was published subsequently in the Federal Register, does not appear to be entirely consistent with the guidance in this memorandum. (See below for a brief discussion of the policy letter.) However, it seems likely that agencies are expected to make sourcing determinations based on the policy letter, though whether OMB (or OFPP) has explicitly addressed the existence of two sets of guidance and reconciled the differences is unknown. Framework for Managing the Multi-Sector Workforce OMB’s framework comprises workforce planning, sourcing determination, and management. Under workforce planning, an agency reviews its mission, goals, functions, workload, and desired performance standards to determine its workforce needs, specifically the size and skills of its workforce. Next, agency personnel determine which functions must be performed by federal employees, and which ones may be performed by either federal employees or contractor employees. OMB provides a table with three categories of functions—inherently governmental, critical, and essential—and indicates, for each category, which sector may perform the work. If the table indicates that either federal employees or contractors may do the work, then the agency is required to conduct a cost analysis “that addresses the full costs of government and private sector performance and provides ‘like comparisons’ of costs that are of a sufficient magnitude to influence the final decision on the most cost effective” option.73 Management, the third component of OMB’s framework, involves facilitating collaboration across the agency, providing for processes that address and integrate the interests and needs of organizational components involved in managing the multi-sector workforce, and ensuring that the agency’s senior leadership is engaged in multi-sector workforce management.74 71 Section 1423 of the Services Acquisition Reform Act (SARA) of 2003, which was enacted as part of P.L. 108-136, National Defense Authorization Act, FY2004, authorized the establishment of this panel. It is also known as the “SARA panel.” 72 Acquisition Advisory Panel, Report of the Acquisition Advisory Panel to the Office of Federal Procurement Policy and the United States Congress, p. 392. 73 Orszag, “Managing the Multi-Sector Workforce,” pp. 1-2 (attachment 1). 74 Ibid., p. 2 (attachment 1). Congressional Research Service 25 Sourcing Policy: Selected Developments and Issues Multi-Sector Workforce Pilot Each agency that is subject to the Chief Financial Officers Act was required to conduct a pilot human capital analysis of “at least one organization, program, project or activity … where there are concerns about the extent of reliance on contractors and take appropriate steps to address any identified weaknesses.”75 Conducting the analysis involves reviewing the multi-sector management framework, identifying an agency official “who will be responsible for the pilot,” “select[ing] an organization for study,” developing an inventory of the workforce that currently performs the function to be studied, analyzing the difference between the configuration of the incumbent workforce and the configuration of the desired workforce (“gap analysis”), and documenting the procedures and tools used in carrying out the analysis.76 After performing the gap analysis, if an agency had identified a discrepancy between the status quo and the optimal configuration of the workforce, the agency was to develop plans to remedy the situation. OMB noted, by way of example, that a remedy might involve bolstering contract management, recruiting and hiring additional federal employees, or insourcing.77 Each agency was to report on its pilot(s) to OMB by April 30, 2010.78 OMB reported in December 2009 that 24 agencies had launched pilot projects.79 Approximately one-third of the pilots involved acquisition offices or functions, and another third involved information technology functions. The remaining pilots involved a variety of functions, such as federal financial audits, management support, and foreign labor certification processing.80 Most of the nine agencies that had IT pilots “reported that they are heavily reliant on contractors and question whether the agency has the ability to maintain control of its mission and operations. Frequent turnover of contractors at some of the agencies has caused further concern that institutional and technical knowledge will be lost.”81 Insourcing Guidance As envisioned by the Obama Administration, insourcing is a tool agencies may use to achieve the “best mix” of federal employees and contractor employees.82 Although insourcing is not necessarily a new phenomenon,83 it appears that Section 739 (Division D) of P.L. 110-161, as amended, and this OMB memorandum represent an initial effort to develop insourcing policy. 75 Ibid., p. 1 (attachment 2) Ibid., pp. 1-2 (attachment 2). 77 Ibid., p. 2 (attachment 2). 78 Ibid., p. 3 (attachment 2). 79 U.S. Office of Management and Budget, Acquisition and Contracting Improvement Plans and Pilots: Saving Money and Improving Government, December 2009, p. 8, at http://www.whitehouse.gov/sites/default/files/omb/assets/ procurement_gov_contracting/Acquisition_Contracting_Improvement_Plans.pdf. 80 Ibid., pp. 9-10. 81 Ibid., p. 9. 82 Orszag, “Managing the Multi-Sector Workforce,” p. 1 (attachment 3). 83 A Federal Times news article reports that the first insourcing case that involved a public-private competition occurred in the mid-1980s. Officials with the General Services Administration (GSA) believed that a contractor performing building maintenance “was charging too much.” A public-private competition was held, and GSA employees won the competition, “saving GSA millions of dollars.” (Tichakorn Hill, “Competitive Sourcing Manager Also ‘Insourcing’ Advocate,” Federal Times.com, January 26, 2006.) 76 Congressional Research Service 26 Sourcing Policy: Selected Developments and Issues Agency personnel will also need to consult OFPP Policy Letter 11-01, which addresses insourcing and is discussed below. General Management Responsibilities The OMB memorandum notes that many agency officials share responsibility for making insourcing decisions; advises agency personnel that they should review contractors’ activities on an ongoing basis; and recommends that any inherently governmental work, or unauthorized personal services,84 being performed by a contractor be insourced. Additionally, it advises agencies to be ready to develop sufficient in-house capability when “internal control of mission and operations is at risk” because of the use of contractors, and alerts agencies that they must have sufficient resources to manage and oversee contractors.85 General Consideration of Federal Employee Performance Addressing a requirement found in Section 739(b)(2) of P.L. 110-161, as amended, OMB advises agencies that ongoing management reviews that involve the improvement of agency operations should include an evaluation of functions that could be candidates for insourcing.86 Notably, OMB states that the evaluation should include “a cost analysis that addresses the full costs of performance and provides ‘like comparisons’ of relevant costs to determine the most cost effective source of support.”87 OMB states that a cost analysis is unnecessary in situations where agency managers determine that “performance and risk considerations in favor of federal employee performance will clearly outweigh cost considerations.” To assist in determining whether a cost analysis is needed, an agency’s insourcing guidelines should include factors to use in evaluating performance and risk considerations and provide examples of factors.88 Special Consideration of Federal Employee Performance The statutory requirement regarding special consideration generally requires an agency to evaluate a specific type of function to determine whether it is a candidate for insourcing.89 To aid agencies in determining when a function described in Section 739(b)(2)(A) of P.L. 110-161, as amended, ought to be a candidate for insourcing, OMB provides the following two questions for agencies to use: 84 “‘Personal services contract’ means a contract that, by its express terms or as administered, makes the contractor personnel appear to be, in effect, Government employees.” (48 C.F.R. §2.101(a).) 85 Orszag, “Managing the Multi-Sector Workforce,” pp. 1-2 (attachment 3). 86 Another tool that may aid an agency in identifying functions to be considered for insourcing is the agency’s own service contract inventory, which is required by Section 743 of P.L. 111-117. Section 743(e)(4) requires an agency head to use the agency’s inventory to “identify contracts that should be considered for conversion to” federal government employee performance or an alternative acquisition approach. Section 743(e)(2)(B)-(D) and (E) requires an agency head, upon reviewing the information in the agency’s inventory, to ensure that the agency is not using contractor employees to perform inherently governmental functions, or perform critical functions in such a way that the agency’s control of its mission and operations could be undermined; is monitoring “functions that are closely associated with inherently governmental functions”; and has established a system for ensuring that activities being performed by contractor employees have not evolved into inherently governmental work. 87 Orszag, “Managing the Multi-Sector Workforce,” p. 2 (attachment 3). 88 Ibid., pp. 2-3 (attachment 3). 89 Ibid., p. 3 (attachment 3). Congressional Research Service 27 Sourcing Policy: Selected Developments and Issues • “Does the fact that the work is performed by contractors cause the agency to lack sufficient internal expertise to maintain control of its mission and operations?” If the agency’s answer is “yes,” then it should begin the insourcing process. If the answer is “no,” then the agency should address the second question. • “Does preliminary analysis suggest that public sector performance is more cost effective and that it is feasible to hire federal employees to perform the function?” If the agency’s answer is “yes,” then a more detailed analysis of insourcing options should be undertaken. If the agency’s answer is “no,” “the agency should not in-source unless performance and risk considerations in favor of federal employee performance will clearly outweigh cost considerations.”90 If an agency’s responses indicate the work should be performed by its employees, but it has encountered difficulties in providing a sufficient in-house workforce, the agency should award a temporary contract and continue its recruiting efforts. The contract continues until federal employees can be hired.91 Another scenario OMB addressed in its memorandum is when an agency has identified a poorlyperforming contractor. The contracting officer must document what the incumbent contractor has done, if anything, to remedy its performance problems. If the contractor has not taken sufficient action to improve performance, the agency has two options: conduct another competition, or consider insourcing. The agency should use the two questions listed above to determine which is the appropriate option.92 Office of Federal Procurement Policy’s Policy Letter 11-01 Another document that may aid agencies in managing their multi-sector workforces is OFPP’s policy letter on inherently governmental and critical functions, which was published in the Federal Register on September 12, 2011.93 Written to fulfill a requirement of Section 321 of P.L. 110-417,94 Duncan Hunter National Defense Authorization Act of FY2009, and respond to the President’s March 4, 2009, memorandum,95 the proposed letter provides definitions of inherently governmental and critical, and policy and guidance for inherently governmental functions, functions closely associated with inherently governmental functions (“closely associated”), and critical functions. The policy letter [c]larifies what functions are inherently governmental and must always be performed by Federal employees … [e]xplains what agencies must do when work is “closely associated” with inherently governmental functions … [r]equires agencies to identify their ‘critical functions’ in order to ensure they have sufficient internal capability to maintain control over functions that are core to the agency’s mission and operations … [and] [o]utlines a series of 90 Ibid., p. 4 (attachment 3). Ibid. 92 Ibid. 93 The policy letter is available at http://www.federalregister.gov/articles/2011/09/12/2011-23165/publication-of-theoffice-of-federal-procurement-policy-ofpp-policy-letter-11-01-performance-of. 94 31 U.S.C. §501 note. 95 The March 4, 2009, memorandum on government contracting is available at http://www.whitehouse.gov/ the_press_office/Memorandum-for-the-Heads-of-Executive-Departments-and-Agencies-Subject-Government/. 91 Congressional Research Service 28 Sourcing Policy: Selected Developments and Issues agency management responsibilities to strengthen accountability for the effective implementation of these policies.96 An inherently governmental function is “a function that is so intimately related to the public interest as to require performance by Federal Government employees.”97 A critical function is “a function that is necessary to the agency being able to effectively perform and maintain control of its mission and operations. Typically, critical functions are recurring and long-term in duration.”98 For additional information regarding this policy letter, see CRS Report R42039, Performance of Inherently Governmental and Critical Functions: The Obama Administration’s Final Policy Letter, by (name redacted), (name redacted), and (name redacted). Policy Issues Competitive Sourcing, Multi-Sector Workforce Management, and Insourcing Multi-sector workforce management, as envisioned by the Obama Administration, might be the first systematic effort to address a previously unexamined area, or facet, of sourcing policy. Competitive sourcing, generally, continued the strain of sourcing policy that had been in effect for over 50 years, which promoted reliance on the private sector and public-private competitions for agency work that had been identified as commercial. Sourcing policy history does not indicate, however, that any Administration prior to the Obama Administration had considered whether the policy of reliance on the private sector might have unintended consequences for the federal government, or had facilitated a comprehensive review of agencies’ activities and contractors’ activities with an eye toward mitigating possible adverse consequences. In its final report on federal government acquisition, the Acquisition Advisory Panel stated that “there has been little, if any, attention paid to the … issue … [of] whether agencies are inappropriately contracting out functions that, while not necessarily inherently governmental in a strict sense, have traditionally been performed by federal workers and are critical to the performance of the agency’s mission.”99 Competitive sourcing and multi-sector workforce management are not necessarily contradictory, or mutually exclusive, policies. Each represents a different, albeit related, facet of sourcing policy. Whereas an emphasis on the importance of the private sector informs competitive sourcing, safeguarding the government’s responsibilities—its missions and operations— underpins multi-sector workforce management. Moreover, the latter approach also (1) expands the circumstances under which federal employees ought to perform, or be permitted to perform, commercial functions (i.e., an agency retains control of its mission and operations); (2) recommends that enhanced government management and oversight of contractors is needed under 96 Office of Federal Procurement Policy, “Publication of the Office of Federal Procurement Policy (OFPP) Policy Letter 11-01, Performance of Inherently Governmental and Critical Functions,” pp. 56227-56228. (Italics in original.) 97 Ibid., p. 56236. 98 Ibid. 99 Acquisition Advisory Panel, Report of the Acquisition Advisory Panel to the Office of Federal Procurement Policy and the United States Congress, p. 399. Congressional Research Service 29 Sourcing Policy: Selected Developments and Issues certain circumstances; and (3) seeks to ensure that only federal employees perform inherently governmental functions. Given the longstanding emphasis on governmental reliance on the private sector, the ideas underpinning multi-sector workforce management may be unfamiliar. “Established processes and procedures are geared toward outsourcing,” according to a 2009 GAO publication, and “shifting to insourcing and a ‘total workforce’ approach—that considers both contractors and federal employees—will take time and requires flexibility to meet the needs of any agency within an ever-changing environment.”100 Although the two approaches to sourcing are not necessarily mutually exclusive, developing a clear, coherent, integrated policy (including implementation guidelines) that strikes a balance between reliance on the private sector and safeguarding the government’s operations and mission might be a challenging undertaking. Competitive sourcing and multi-sector workforce management share a common problem: the conflation of the name of the policy with a possible outcome of the policy. For example, competitive sourcing is the policy while outsourcing is a specific type of possible outcome. Nevertheless, some might refer to competitive sourcing effort as outsourcing. Similarly, multisector workforce management is the policy while insourcing is a specific type of possible outcome. Yet, some observers might conflate the two and refer to the policy as insourcing. The statutory requirement (§739(b)(1)(A) of P.L. 110-161, as amended) for agencies to develop insourcing guidelines and OMB’s related guidance (see “Insourcing Guidance”) might contribute to the mislabeling of multi-sector workforce management as insourcing. Another possibility is that unfamiliarity with the nuance, details, and complexities of a policy might lead some to adopt an erroneous term. The problem with using outsourcing and insourcing to refer to competitive sourcing and multi-sector workforce management, respectively, is that they are inaccurate, and thus potentially misrepresent the policy (and associated implementation efforts), which could sow confusion and create misunderstandings. Additionally, depending upon one’s perspective, the misuse of the terms insourcing and outsourcing could possibly create, or reinforce, negative perceptions of the policies themselves. To aid in understanding the relationship between policy and outcomes, and several of the key distinctions between competitive sourcing and multi-sector workforce management, Table 3 displays selected features of these two sourcing policies. Table 3. Selected Features of Competitive Sourcing and Multi-Sector Workforce Management Policy Purpose Primary Mechanism Possible Outcomes Competitive Sourcing governmental reliance on the private sector Subject agencies’ commercial activities to competition. Conduct a public-private competition. - Enter into a fee-forservice agreement.a - No change in source. - Outsource. - Retain in-house. 100 U.S. Government Accountability Office, Civilian Agencies’ Development and Implementation of Insourcing Guidelines, p. 7. Congressional Research Service 30 Sourcing Policy: Selected Developments and Issues Policy Purpose Primary Mechanism Possible Outcomes Multi-Sector Workforce Management – determine the best mix of federal employees and contractors Determine the appropriate mix, or composition, of agencies’ multi-sector workforces. Review an agency’s functions and work performed by contractor employees. - Bolster internal capability. - Establish, or enhance, oversight of contractors. - Insource. - No change in source. Source: U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a076/ a76_incl_tech_correction.pdf; President Barack Obama, “Government Contracting,” memorandum, March 4, 2009, at http://www.whitehouse.gov/the_press_office/Memorandum-for-the-Heads-of-Executive-Departmentsand-Agencies-Subject-Government/.; Peter R. Orszag, Director, U.S. Office of Management and Budget, “Managing the Multi-Sector Workforce,” July 29, 2009, at http://www.whitehouse.gov/sites/default/files/omb/ assets/memoranda_fy2009/m-09-26.pdf.); Office of Federal Procurement Policy, “Publication of the Office of Federal Procurement Policy (OFPP) Policy Letter 11-01, Performance of Inherently Governmental and Critical Functions,” 76 Federal Register 56233, September 12, 2011, at http://www.gpo.gov/fdsys/pkg/FR-2011-09-12/pdf/ 2011-23165.pdf. Notes: a. A fee-for-service agreement is a “formal agreement between agencies, in which one agency provides a service (a commercial activity) for a fee paid by another agency. The agency providing the services is referred to in … [Circular A-76] as a public reimbursable source.” (U.S. Office of Management and Budget, “Performance of Commercial Activities,” Circular No. A-76 (Revised), May 29, 2003, p. D-5, at http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a076/a76_incl_tech_correction.pdf.) The Federal Government’s Reliance on Contractors As already discussed, governmental reliance on the private sector has been, and continues to be, a policy of the federal government. Concern has arisen among some observers, though, that reliance on the private sector under certain circumstances might create an unacceptable risk for government agencies. “Overreliance on contractors” has been identified by the Obama Administration as an issue that warrants attention.101 In his 2009 memorandum on the multi-sector workforce, the Director of OMB advised agencies to “be alert to situations in which excessive reliance on contractors undermines the ability of the federal government to accomplish its missions.”102 Administration and GAO documents, and academic publications, suggest that the each of the following either contribute to excessive reliance on contractors or are consequences of this phenomenon: 101 A GAO report that was published in 2010 catalogued some of the concerns that have arisen regarding reliance on contractors. “Government contracting has more than doubled to reach over $500 billion annually since [2002]. This increased reliance on contractors to perform agency missions increases the risk that government decisions can be influenced by contractor employees, which can result in a loss of control and accountability. Agencies buy services that range from basic operational support, such as custodial and landscaping, to more complex professional and management support services, which may closely support inherently governmental functions. Such services include acquisition support, budget preparation, and intelligence services…. The closer contractor services come to supporting inherently governmental functions, the greater this risk of influencing the government’s control over and accountability for decisions that may be based, in part, on contractor work.” (U.S. Government Accountability Office, Sourcing Policy: Initial Agency Efforts to Balance the Government to Contractor Mix in the Multisector Workforce, GAO-10744T, May 20, 2010, p. 3, at http://www.gao.gov/new.items/d10744t.pdf.) 102 Orszag, “Managing the Multi-Sector Workforce,” p. 1. Congressional Research Service 31 Sourcing Policy: Selected Developments and Issues • Lack of in-house capacity; 103 • Loss of institutional knowledge;104 • Inadequate management of contractors and their work;105 • Contractor performance of inherently governmental functions;106 • Loss of control over mission and operations, and loss of accountability; or107 • Restriction on the size of government (“more specifically, [limiting] the number of government employees”).108 If overreliance exists, it is possible that the Bush Administration’s emphasis on competitive sourcing contributed to this phenomenon. Following the conclusion of President Bush’s tenure, OMB stated that overreliance on contractors was “encouraged by one-sided management priorities that … publicly rewarded agencies for becoming experts in identifying functions to outsource….”109 For example, OMB issued memoranda that required agencies to submit 103 Ibid. A failure to invest in “human capital planning, recruitment, hiring, and training that are necessary for building strong internal capacity … [can force agencies] to rely excessively on contractors because internal capacity is lacking.” (Ibid.) GAO echoed this assessment in 2010, writing that “the increased reliance on contractors to perform the work of government is in part attributed to difficulties in hiring for certain hard-to-staff positions, training and retaining government employees.” (U.S. Government Accountability Office, Sourcing Policy: Initial Agency Efforts to Balance the Government to Contractor Mix in the Multisector Workforce, p. 8.) The government’s acquisition workforce, which is reportedly understaffed and undertrained, is a notable example of agencies’ reliance on contractors. GAO stated that agencies “have relied increasingly” on contractors for acquisition activities, as “the capacity and capability of the … acquisition workforce” has failed to keep pace “with increased spending for increasingly complex purchases.” (Ibid.) The lack of sufficient internal cap [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR42341. Public record. Not legal advice.