Turner, Robert W.. Supply Management and Procurement. Ft. Laud.docx

Turner, Robert W.. Supply Management and Procurement. Ft.
Lauderdale, FL, USA: J. Ross Publishing Inc., 2011. ProQuest
ebrary. Web. 22 February 2016.
Copyright © 2011. J. Ross Publishing Inc.. All rights reserved.

JOURMAL o r PUBLIC PROCUREMENT, VOLUME 13, ISSUE
3,289-314 FALL 2013
DISPELLING FEAR AND LOATHING IN GOVERNMENT
ACQUISITION: A
PROPOSAL FOR CULTIVATIONAL GOVERNANCE IN DOD
SOURCE
SELECTIONS
Steve M. Maser and Fred Thompson*
ABSTRACT. Government contracting is rife with
miscommunication and
misperception, sometimes unavoidably, and is often associated
with
secrecy, autarky, and opportunism. These qualities undermine
trust,
increase contracting costs, and reduce effective collaboration
between
business and government. In this article we show how mutual
trust can be
repaired and, once repaired, bumped up and made much more
robust
through cultivational governance. The proximate aim of the

article is
improving source-selection in government acquisition; its
scholarly purpose
lies in contributing to a process theory for recovering and
reinforcing trust.
INTRODUCTION
Opportunism, the pursuit of self-interest by means of duplicity
and
guile, is a key concept in neo-institutional economics
(Williamson,
1967, 1985). It manifests itself in fraud, waste, and abuse. Many
observers claim that, where defense acquisition and contracting
are
concerned, it is endemic (Spiller, 2009, p. 49). Moreover,
because
social relationships, characterized by ambiguity and asymmetric
information, are its native habitat, some observers add that
opportunistic behavior is especially likely where source
selection is
* Steve M. Maser, Ph.D., Professor of Public Management and
Public Policy
at Willamette University's Atkinson Graduate School of
Management.
Research interests: conflict management and collective choice.
Fred
Thompson, Ph.D., is Grace & Elmer Goudy Professor of Public
Management
and Policy at Willamette University's Atkinson Graduate School
of
Management, and Director of the Willamette University Center
for
Governance and Public Policy Research. Research interests:
mechanism

design and financial engineering of government enterprises.
Copyright © 2013 by PrAcademics Press
290 MASER fifTHOMFSOh
concerned (Jansen, Hocevar, Rendon, & Fann, 2009).^ The
source-
selection process comprehends evaluating bids and proposals,
selecting providers, negotiating contract terms and conditions,
and
awarding contracts.
Nevertheless, some of those who have looked carefully at the
source-selection process deny that, as a practical matter,
opportunism is a serious problem. They by no means deny its
existence. Rather, they assert that existing institutional
arrangements
work to minimize the losses caused by opportunism and propose
that
these arrangements are pretty good solutions to a difficult set of
transactional problems (Maser, Subbotin, & Thompson, 2012).
The
efficacy of bid protests is central to this assessment. This
mechanism
relies on interested third parties to ensure that acquisition
officials
follow the rules2 that govern source selection. Nevertheless,
while
protesting is cheap and easy, protests are rare and successful
protests even rarer. About two percent of all protestable source-
selection decisions are protested and, where the General
Accountability Office (GAO, the audit, evaluation, and
investigative

arm of the U.S. Congress) hears protests, only five percent
succeed
(Gansler & Lucyshyn, 2009). This implies an error rate of about
one in
a thousand, which is pretty good by almost any standard.^
As good as these results are, if the aim is dramatically improved
performance of the acquisition function, they are arguably not
good
enough. While existing institutional arrangements work to
lessen the
manifestations of opportunistic behavior in government
contracting,
they leave the participants in the source-selection process
constantly
on the look out for opportunism from their would-be
collaborators and
partners. This is very costly. Its costs are reflected in defensive
effort,"^
risk aversion, lack of initiative and imagination, and failed
partnerships (Thompson, 1993; Teisman & Klijn, 2002). These
consequences go well beyond the effects of fraud and abuse and
are
themselves among the chief causes of waste In defense
acquisition
and contracting.
How do we get from where we are - a source-selection process
dominated by habits of secrecy, autarky, and opportunism - to
one
based on collaboration, learning, and shared problem solving
(Franck,
Lewis, & Udis, 2008; Kapstein & Oudot, 2009; Elliott &
Johnson,
2011)? The answer to this question lies in building and
sustaining

DISPELLINQ FEAR AMD LOATHIIiQ Ifi GOVERrfMEMT
ACQUISITION 291
presumptive trust among the government-business participants
in the
source-selection process.^
In this article we will describe the pervasive mistrust that is
characteristic of the source-selection process, the events that
have
broken trust among its participants, and, following Kramer and
Lewicki (2010), show how trust can be repaired and, once
repaired,
bumped up and made more robust. We will also show that many
of
government's initiatives appear to be well designed to repair
trust or
correct the behaviors that inspire mistrust, but absent an explicit
commitment to building a presumption of trust throughout the
acquisition community there is a good chance these efforts, no
matter how well intentioned, will be stillborn.
What is Trust and Why Does it Matter?
It is fairly easy to define trust. According to Lewis and Weigert
(1985, p. 971) trust is the willingness to undertake "a risky
course of
action on the confident expectation that all persons involved in
the
action will act competently and dutifully." According to Mayer,
Davis,
and Schoorman (1995, p. 712) trust is "the willingness of a
party to

be vulnerable to the actions of another party based on the
expectation that the other will perform a particular action
important
to the trustor, irrespective of the ability to monitor or control
that
other party." In other words, as Kramer and Lewicki (2010, p.
257)
explain, trust is "a psychological state characterized by ... some
sort
of positive expectation regarding others' behavior."
It is harder to say why it matters. One can repeat Francis
Fukuyama's assertion that it is the single most valuable
currency of
the modern global economy, the maker and breaker of nations,
but
that is hardly satisfactory. We need something that speaks
directly to
contracting. Nobel laureate Elinor Ostrom (1990) comes closer
to
meeting that need with her conclusion that reciprocity and trust
are
necessary to sustain productive relationships, for resolving
social
impasses, and in coordinating collective efforts to achieve
superior
outcomes (relative to Nash equilibriums, where participants
maximize
their minimum gains or minimize their maximum losses). Trust
means
that contracts (formal or informal) will be carried out faithfully;
that
participants in commercial transactions need not waste
resources
protecting themselves against cheats or from other forms of
malfeasance; and that effort, which would otherwise be

expended
292 MASER SíThOMPSOri
watching out for trouble or invested in fruitless conflict, can be
employed productively.
The increase in the number of bid protests during the past few
years, including a few well-known and contentious ones, led us
to
take a hard look at defense contracting and source selection.^
What
we found was a yawning trust gap. Rather than a presumption of
trust
within the broader community of practice, we observed
pervasive
mistrust.
THE TRUST GAP
Using a protocol designed to diagnose the causes of conflict
(Ury,
Brett, & Goldberg, 1988). we engaged in structured interviews
averaging about 90 minutes each with attorneys at GAO, which
has
primary responsibility for refereeing bid-protests. We also
interviewed
executives and in-house counsels at four prime contractors, four
outside bid-protest counsels, contract managers at two small
subcontractors, current and former officials in the Office of the
Secretary of Defense (OSD), officials and in-house attorneys at
three
military commands: Air Force Material Command, Naval Air
Systems

Command, and the Defense Logistics Agency; Senate
Committee
staff, and executives - typically, former Department of Defense
(DOD)
contracting officers - v/ith industry trade and professional
associations such as the Aerospace Industries Association, the
National Contract Management Association, the Professional
Services
Council, and TechAmerica.
We do not claim that our interviewees constitute a
representative
sample of the acquisition community. They comprise a network
initiated through people we knew professionally and expanded
as
respondents recommended others who could share different
perspectives. They offered their perceptions as individual
participants
in the source-selection process, not as representatives of the
organizations with which they are associated. Many of their
insights
are suggestive, not definitive.
Nevertheless, one message came through loud and clear: the
folks we talked to distrust each other. Many of them distrust the
source selection process itself, claiming that it is inherently
biased.
Several insisted that Democratic administrations favor some
companies. Republicans others; that defense agencies have pets;
ACQUISITION 293
that contractors protest for all sorts of spurious reasons; and

that the
GAO kowtows to congressional interests. Each participant in
this
process tends to attribute base motives, involving narrow,
parochial
interests, to the others: that acquisition officials seek the best
deal
for government they can get on the contract at hand, regardless
of
the consequences for the winning contractor, the sustainability
of the
industry, or losses to other customers; that potential suppliers
cut
corners to win contracts; that, once government is locked into a
contractual relationship, incumbent suppliers will exploit the
situation
to the maximum extent possible; that Congress is preoccupied
by
short-term constituency considerations; and that everyone lies.
It is often contended that qualitative research is more about
"feel" than systematic process. In this instance that contention
was
amply confirmed. What we found was a substantial trust gap.
Trust/mistrust was not initially part of our analytic schema or
included
in our protocol. Given the size of the trust gap, we inferred that
even
blameless actions could trigger a conflict spiral (Sanders, 2010;
Sanders & Mullins, 2010). By conflict spiral, we mean a cycle
of
action and reaction in which each reaction is more severe and
intense than the action that preceded it, and each action in the
spiral
provides new issues or grievances, often leading to bad
outcomes for

everyone concerned.
How does a source-selection conflict gather steam (Carpenter &
Kennedy, 2001)? A source-selection conflict usually starts with
a
rejected offeror, who is unhappy with an acquisition agency's
decision. The offeror seeks redress. Agency officials resist.
Other
parties then jump into the fray: the winner of the source-
selection
contest in support of the agency, elected officials to help
injured
constituents, the media and others, thereby, expanding the
conflict.
Positions harden and perceptions of the problem become rigid.
As the
conflict escalates, communication becomes more difficult;
misunderstandings multiply. Zealots replace moderates,
investing
resources to win rather than to resolve the disagreement.
In the case of bid protests, the desire to win at almost any costs
may prevail from the outset. A trade association official
described the
approach taken by many bidders going into a competition as
"intensely motivated:"
When you bid you commit money and people. This inspires ...
a military mindset, a compulsion to win, to "take the hill." Not
294 MASER&THOMFSOfi
winning is simply unacceptable. If you don't win, you can't
perform. You have to win ... at any cost.

This mindset leads rejected bidders to appeal to citizens and
authorities outside the circle of participants in the selection
process.
Uncertainty about outcome generates anxiety. Perceptions
distort:
parties lose objectivity; gray areas become black or white;
seemingly
innocuous behaviors become meaningful as distrust and
suspicion
grow. Finally, having left behind solutions that might have been
feasible early in the process, the conflict consumes resources
that
the original parties never intended to commit.
SOURCES OF DISTRUST IN SOURCE SELECTIONS
A potential for destructive conflict is inherent to the source-
selection process. Selecting winners necessarily implies losers.
It is
human nature for losers to blame others - to believe they have
been
treated badly or unfairly (Malhotra & Bazerman, 2007, p. 135) -
rather than themselves. Sometimes they are right: government
has
failed to follow its own source-selection rules. Far more often
than
not, they are wrong. In both cases, GAO's bid-protest
mechanism
works to sort out the consequences quickly, surely, and
efficiently. It
also works to educate offerors about the rules governing federal
acquisition.
There is a prior question, however. How can destructive
conflicts

be prevented or, if not prevented, nipped in the bud? Kramer
and
Lewicki (2010) assert that the main difference between a
productive
disagreement and a no-holds-barred fight is presumptive
trust/mistrust. If so, the answer to this question lies in getting
the
participants in the source-selection process to trust each other.
So,
what causes the presumptive mistrust that characterizes the
source-
selection process, in particular, and defense contracting, in
general?
What conditions give rise to negative expectations about the
motives
and competencies of the other participants in this process?.
Thompson (1993, p. 310) proposed that trust is fragile, that it:
[C]an be poisoned by a single lapse of honesty or fair dealing;
by contempt on the part of one of the parties for the abilities,
judgment, or ethical standards of the other; by an excess of
zeal or an overtly adversarial or confrontational approach or
by a simple lack of communication.
ACQUISITION 2 9 5
More precisely, Kramer and Lewicki (2010; see also La Porte &
Metlay, [1996]) specify that mistrust is typically triggered by
the
following kinds of transgressions:
- Communications failures: not listening, not working to

understand
other parties, and unwillingness to address major issues;
- Performance failures: unwilling or unable to perform basic
responsibilities, making mistakes, issues of general competence;
- Breach of rules: poor decisions, bias or favoritism;
- Incongruence: misaligned with or inimical to the core values,
mission, purposes of the joint enterprise; actions do not match
words; and
- Unwillingness to acknowledge: taking no responsibility for
mistakes or issues, not owning issues or the violation itself,
placing self before the enterprise.
Other studies have shown that the size of transgressions and
their frequency matter, as does their timing. Transgressions that
occur early in a relationship are more damaging than those that
occur
after a relationship has been established (Tomlinson, Dineen, &
Lewicki, 2004; Lount, Zhong, Sivanathan, & Murnighan, 2008),
which
may in part account for the propensity of inexperienced losers
to
protest source selections, as well as the paucity of success of
those
protests (Gansler & Lucyshyn, 2009).
The conflict management literature implies that these sorts of
transgressions should be forestalled. And, indeed, many
contracting
officials concur with this assessment. As a DOD contracting
official
put it - "protests happen because of organizational dysfunction;
what

an agency does to conduct a good source selection is also what
will
avoid a protest." Consequently, various defense agencies have
taken
steps to avert trust-damaging transgressions: improving
communications at every stage in the acquisition process,
starting
with formulation of requirements and continuing all the way
through
the execution of the contract; strengthening the capacities of
. contracting officials to perform their roles and subjecting their
actions
and decisions to peer review, disclosing draft requests for
proposals
(RFPs), and thoroughly debriefing losers to help them
understand how
they can do better in the future (see also Thompson, 2009, p.
165).
296 . MASER & THOMPSON
Performance Failures and Breach of Rules: Competence
Competence is the first line of defense against the errors that
give rise to mistrust and, thereby, against presumptive mistrust.
This
means aligning the knowledge, skills and motives of the
acquisition
workforce, through training, recruitment and retention,
guidance, and
incentives, with their responsibilities, so that selections are
done
correctly and protests are anticipated and avoided. Defense

agencies
have devoted considerable effort to recruiting and training a
more
highly skilled acquisition workforce, but attention to these
matters
has been imperfect and gaps remain.^
To compensate for these gaps, maintain standards, and provide
credibility, the Under Secretary of Defense for Acquisition,
Technology, and Logistics has established a multi-agency
system of
peer review for source selections, where contracts exceeding $ 1
billion for supplies and services are concerned. The Under
Secretary's
memorandum, dated September 29, 2008, also directs
contracting
agencies to design internal peer-review systems for contracts
valued
at less that $ 1 billion. Most agencies now have some kind of
peer-
review system up and running. This program has, by most
accounts,
worked to reduce trust-damaging transgressions in source
selections,
but, like better acquisition-workforce training, it is not
infallible.^
Logically speaking, peer review is a quality assurance program
that relies upon inspecting every source selection prior to
delivery:
quality of the source-selection process is the "end," universal
peer
review the "means." As such, peer review has two key
functions: audit
and ex ante evaluation. In performing the audit function, peer
reviewers must verify that the source-selection team followed

prescribed procedural standards. In performing the ex ante
evaluation function, they must gauge the substantive outcomes
that
will result from the policies recommended by the source-
selection
team. If the peer reviewers find the source selection defective
on
either count, it must be reworked. In the end, this program can
be no
better than the reviewers it relies upon or the efficacy of the
rework
process.9
We presume that if better, more uniform, human-resources
management practices throughout the Defense Department's
acquisition workforce would help to reduce trust-damaging
transgressions in source selections,^^ so too would
standardized, high
ACQUISITION 297
quality peer review. But humans make mistakes. Errors, real or
perceived, are inevitable.
Communication Failures: Explanations
Good explanations repair trust, especially where perceived error
is
concerned. Just as government has sought to improve the quality
of
its decisions, it has also sought to explain its decisions better.
The
Federal Acquisition Streamlining Act of 1994 mandated agency

debriefings. Bidders have the right to ask agencies to explain
their
selection decisions and contract awards; losers can ask why
their
bids were rejected. Most observers give this mandate credit for
a
drop in protests after 1994.
Here too, however, take up has been uneven. This is the case for
two reasons. First, the 1994 Act requires agencies to explain
their
decisions only when losers ask for an explanation. Second, it
allows
agencies considerable discretion in the content of their
explanations.il Consequently, some agencies thoroughly explain
all of
their source selections and give losers ample opportunities to
ask
questions. Their explanations typically feature multiple
members of
the source-selection team, including engineers and attorneys,
presenting the same information conveyed to the source-
selection
authority. These kinds of explanations can repair trust. Other
agencies provide explanations only when asked and say no more
than the minimum required by law. In which case, the
explanation
might take the form of a ten-minute presentation, scripted by an
agency attorney, consisting of one or two PowerPoint slides,
with little
or no opportunity for the loser to ask questions.
Agencies give bad explanations because they fear losers will
use
the information against them. Consequently, they apply a
standard of

disclosure tied to surviving a protest at GAO, which is
obviously
different from one aimed at building or repairing a trust-based
relationship. Moreover, in many instances, the agency needs the
winner's permission to share information about its bid with the
loser.
Even where that permission is granted, the winner may insist
that
competitive or proprietary information be redacted from the
agency's
explanation of its source-selection decision. Winners also fear
that
information will be used against them. But, of course, mistrust
encourages mistrust. As Kramer and Lewicki (2010) explain,
one
298 MASER fif THOMPSOfi
builds trust by awarding trust to others, even when confidence
in
them is lacking.
Unwillingness to acknowledge: Apologies
Apoiogies are a way to repair trust when a transgression has
occurred and, thereby, normalize relations. While Federal
Acquisition
Regulations (FAR) require explanations and admissions of error
on
the part of agencies, along with specific reparations, they
evidently
discourage apologies. As Charles Tilly (2006, p. 53) explains,
recipients of apologies typically regard them as
characterizations of

their relationship to the givers, not as cause-effect explanations.
Because trust is largely based on reciprocity,i2 good apologies
characterize relationships as equal partnerships and the
practices
governing relationships and the connections between the
participants
as reciprocal, as is the case when an agent takes personal
responsibility for a transgression. Denying individual
responsibility
(the FAR made me do it; technical considerations required my
actions, etc.) implies a hierarchical relationship. Trust is
conceivable
in a hierarchical relationship only where the inferior
acknowledges
the authority and the competence of the superior and, even then,
the
wrong kind of apology (blaming the recipient or some external
cause
for the transgression) or one that is perceived to be insincere
can be
hard on trust. Source-selection agencies are rarely willing to
grant
bidders equal status, in part because of a fundamental
asymmetry in
the legal relationship. Government procurement law is
affirmative
law, meaning government as buyer is required to do everything
it says
it will do; a business as seller cannot be made to do anything it
is not
asked to do. It is very difficult for government officials to
acknowledge
they failed to do what they were legally required to do, which is
what a
good apology implies.

Even if that were not the case, agencies might not offer
appropriate and effective apologies out of fear that they would
be
used against them.^^ Finally, as Kramer and Lewicki (2010, p.
255)
observe: "Explanations and apologies are more effective when
combined with reparations; open offers of reparations (inviting
the
victim to define the terms and conditions) tend to be more
effective
than specific targeted offers." Again, the FAR evidently
discourages
open offers of reparations, although many of the individuals
who have
gone through the source-selection process tell us that they are
not
unusual.
ACQUISITION 2 9 9
BUILDING TRUST
Building trust is harder than repairing it. A sense of
membership
in a common enterprise constitutes the basic foundation for
trust: a
positive expectation of reciprocity within the boundaries of
shared
identity. Unfortunately, the acquisition community is not a
community
(in this case, what might be described as a community of
inquiry or
practice). Rather, the intricate nexus of social relations that

characterize the contracting/source-selection process introduces
myriad cleavages and fault lines. As Kramer and Lewicki (2010,
p.
262) explain, "the salience of subgroup identities enhances
inter-
group bias and competitive orientations, thereby undermining
trust
and cooperative behavior." They further argue that there is a
tension
between the bonding trust that arises within subgroups versus
the
bridging trust that might help subgroups cooperate. Since the
participants in the source-selection process often do not
perceive that
they are part of a common enterprise, but instead, belong to a
set of
disparate communities, it is no surprise they tend to distrust
each
other.
Building Trust Means Building Communities of Practice
It is our impression that negative expectations that pervade
source selection begin with commercial rivalry. The companies
seeking government contracts do not play with all their cards on
the
table. They want to create advantages for themselves, which can
be
productive for all concerned where advantage is pursued in
terms of
product, price, and past performance, but not where it is
unfairly won.
Most bidders seem predisposed to believe their commercial
rivals will
stop at almost nothing in pursuit of a competitive advantage and
will

exploit every edge they can get. This mistrust undermines
confidence
in the contracting process as a whole. For example, companies
buy
expertise about the contracting process by recruiting contracting
officers from government agencies. Competitors often fear that
these
contracting officers will trade not only on their expertise but
also on
their relationships with decision makers in the contracting
command.
Certainly bidders often seem obsessed with protecting
proprietary
information, even where that information has little real market
value,
although learning requires a free flow of information. This leads
them
to censor the information agencies can divulge in debriefings
and
sometimes even to deny themselves access to information that
would
300 • MASER fiíTHOMPSOri
help them win contracts. For example, because questions posed
during discussions about a solicitation will be public, "...merely
asking
a question at this stage or the content of a question might reveal
something about your product and the state of your technology
that
you don't want your competitors to know."
Lawyers are inherently adversarial. For example, a bid-protest

attorney told us that it is always safer to assume that agencies
won't
correct their own mistakes. "They are more likely to circle the
wagons.
An agency review is a single filing, no discovery, and you wait
for an
agency to decide." Consequently, involving lawyers in the
source-
selection process, almost necessarily creates a climate of
mistrust.
The implication being that they ought to be excluded wherever
possible. Indeed, another bid-protest attorney advised, "do not
admit
a lawyer into any forum where the agency is on the other side,
even
the debrief, unless you've already decided to file a protest."
The logic behind this advice is compelling although currently
untenable. While agencies can restrict the number of people
sent to a
debriefing, they cannot preclude a rejected bidder from bringing
an
attorney. Moreover, where the FAR is concerned, absent a
lawyer, a
losing bidder might not understand agency decisions even after
fully
interrogating agency officials during the debriefing. On the
other
hand, if bidders were required to have non-lawyers on staff
certified
to understand the FAR and especially the rules governing source
selections, this advice could be more tenable. Were certification
to
become the coin of. the realm within government's acquisition
workforce (Fast, 2009), it should also be required of teams
seeking

government contracts. Understanding the rules governing the
process
would seem to be a basic condition for building communities of
practice around the source-selection process.
Rules Help, but not Necessarily the Rules We Have
That many of the members of the acquisition community are ill-
socialized into the structure of rules governing their common
enterprise or are ignorant of each others' identities, decision
rights,
and responsibilities are significant sources of sub-group
tension. It is
a commonplace that rules governing an enterprise constitute an
important basis for trust building. As Kramer and Lewicki
(2010, p.
264) explain: "Rule-based trust is not predicated on members'
ability
to predict specific others' trust-related behaviors, but rather on
their
ACQUISITION 3 0 1
shared understandings regarding the normatively binding
structure of
rules guiding - and constraining - both their own and others'
conduct.... [R]ule-based trust is sustained ... by members'
socialization into the structure of rules. When socialization
processes
are perceived as efficacious, trust results. When they are
perceived
as weak, ineffectual, and lacking normative power, it does not"
(see

also Bardach and Kagan [2002]).
Kramer and Lewicki (2010, p. 262) further argue that rule-based
trust can be reinforced by clearly defined, complementary roles.
Indeed, if subgroup obligations are defined in terms of a
common
enterprise, and are, in turn, supported by and integrated with the
community's identity, then friction between subgroups can be
precluded. In fact, shared knowledge about subgroup identities,
decision rights, and responsibilities provides the basis for
presumptive trust within a community of practice.
Problems arise when these conditions are not met. For example,
contracting commands need expertise from potential suppliers
to
define requirements. But many potential suppliers lack
sufficient
understanding of the rules governing contracting to respond to
requests for information, let alone proposals. Not only does this
lead
to inferior requirements, relative to those that are theoretically
feasible, it can exclude the best suppliers from the source
selection.
In such cases, regulations, which were designed to create
fairness,
have the opposite effect because of their complexity. Moreover,
even
if ill-socialized suppliers participate in a source selection, they
are
likely to be much more distrustful of the process and more
likely to
question decisions that go against them. Smaller, less-
sophisticated
companies, for example, comprise a disproportionate source of
bid
protests. Hence, a mechanism, which would allow all potential

suppliers to understand the rules governing source selection and
the
roles and responsibilities of the other participants in the
process,
would go a long way toward building bridging trust.
So, what would such a mechanism look like? To answer this
question, it might be useful to recover the best-known attempt
on the
part of the US government to build a collaborative, learning
community involving government and business and, then, to see
if we
cannot extrapolate from that experience to defense acquisition.
According to Gerald Berk (2009, see also Thompson, 2010), the
Federal Trade Commission was initially conceived as a new
kind of
302 MASER oí THOHPSOfi
governance scheme. Berk calls this scheme "cultivational
governance."
Cultivational governance involved the creation of public-private
collaborations, called associations, which formulated "codes of
fair
competition" for industries and trade groups. These codes
defined
the obligations each member of an association owed the others
and
their collective obligations to the public at large. Cultivational
governance sought to channel "competition from prédation to
improvements in products and production processes" to correct
destructive business habits of secrecy, autarky, and opportunism
and

to use associations, dialogue and open exchange of information,
to
achieve collective learning that would increase their members'
productivity and profitability (Berk, 2009, p. 117).
The pattern for cultivational governance was found in Arthur
Eddy's developmental associations. These were communities of
inquiry, where dialogue and social learning took place and
where
erstwhile rivals could establish relationships based on openness
and
reciprocity (Berk, 2009, pp. 63-64).
Eddy explained how ... he invented a new form of competition.
He asked firms in steel construction and cotton printing to
submit pricing data in the midst of a bidding competition.
When the bidding ended, he compiled the data, distributed it
to the participants, and organized a forum to discuss the
outcome. Participants inevitably raised broader questions....
Eddy found that the more competitors learned to play with
"their cards on the table" the more they stood back from the
precipice of cutthroat pricing and concentrated instead upon
service, product quality, and productivity. The "new
competition." Eddy concluded, was "cooperative." By pooling
and discussing information, business learned to channel
rivalry from opportunism to genuine improvements in
products and production processes.
The key to the success of Eddy's developmental associations lay
in sharing business secrets with rivals. This made their members
vulnerable to their peers and, in so doing, provided a basis for
presumptive trust. Because this process was voluntary, there
had to
be a payoff to the members. In this case, there were two:
reducing
unproductive competitive rivalry and more rapid learning about

products and production processes.
ACQUISITION 3 0 3
What the FTC had to offer these communities was legitimacy.
The
FTC could vouchsafe associational activities and contractual
restraints that would otherwise have been unenforceable and,
perhaps, subject to prosecution. More importantly the FTC
guaranteed to the public and to association members that the
associations were not "'conspiracies in restraint of trade'" but
were
instead collaborations aimed at increasing the average level of
performance among their members, while at the same time
decreasing the performance spread among them. As is almost
always
the case with business-process improvement, the intelligence
needed
to solve problems didn't necessarily reside close at hand,
developmental learning required association members to be
actively
engaged in understanding why some actions seemed to work and
others didn't. Consequently, cultivational governance at the FTC
helped trade-association members reach agreement on what was
worth achieving, set in motion the processes by which they
learned
how to do what they needed to do, and helped refine the
measures
association members used to assess performance and thereby
practice improvements.
Administratively these tasks were assigned to the FTC's Trade
Practice Conference Division, which "sought to build

deliberative,
scientific, and evaluative capacity ... through public/private
collaboration" (Berk, 2009, p. 29). An early trade conference
held by
the FTC to discuss its report on the fertilizer industry provided
the
model for the division's activities. Most of the industry showed
up and
voluntarily worked out a successful code of fair competition.
Subsequently, the FTC launched a full-scale trade conference
program "premised on the assumption that it was often difficult
for
individual firms to make sense of the social causes and
consequences of their actions (p. 138).... Among the defining
features of this program was the elaboration of codes mandating
'uniform cost accounting, benchmarking, and interfirm
deliberation'"
(p. 29). FTC sanctioned rules governing trade associations
typically
mandated frequent reports o n . their members' practices and
productivity and quarterly association meetings where those
results
could be discussed and debated, allowing ample opportunities
for
learning."
304 MASERA THOMPSOh
The UK Highways Agency's Collaborative Approach to Supplier
Management and Engagement
Applying something like the FTC's approach to public/private
collaboration to source-selection is not a completely outré
proposal.

The UK Ministry of Transport (MOT) is experimenting with
public-
private arrangements that have many of the elements of
cultivational.
governance to manage its highway-maintenance contracts
(Elliott &
Johnson, 2 0 1 1 , pp. 107-8). The Highways Agency adopted
this
approach in response to cost and schedule overruns. Because the
MOT had experienced these unhappy outcomes as far back as
anyone remembered, under both "firm" fixed-price arrangements
that
awarded contracts to low bidders and under cost-plus
arrangements
that awarded contracts to "best offers" based on detailed work-
breakdown structures, the highways agency wanted to try
something
entirely new (although justified by "best-practice research in
supply-
chain management"): the creation of a genuine community of
practice based upon "espoused values, shared goals, and ... peer
pressure," comprising project designers, managing contractors,
and
specialist contractors, who would work with the Highways
Agency
under fixed-term partnership agreements and a derived pricing
system, rather than bidding for individual contracts.
The Highways Agency's process of building a community of
practice begins with a regional facilitated workshop involving
about
20 contractors "designed to challenge the adversarial approach
typical of the construction industry" and establish the terms of
reference under which the partnership would operate. The
agency left
it the participating contractors to decide "what they do, how it

was
done and how they proved it." Aside from a consistent emphasis
on
partnership and working together, the agency relabeled the
contractors as specialists and sub-contractors as supply chain
partners, required that each partner be aftorded equal status and
share equally in rewards that accrued to delivering projects on
time
and under budget (and the costs, where they failed), and
stipulated
that each partner would contribute "to funding a Community
Management Team which monitors performance, identifies areas
for
improvement, and promotes initiatives to share better
practices."
Johnson and Elliott report t h a t over time, "several additional
structural forms were developed to encourage ongoing
communication, reflection and innovation. For example, 'Off-
line'
ACQUISITION 3 0 5
groups enabled the development and sharing of resources and
practices. Convened away from project delivery, three main
groups,
namely, process, culture, and measurement were supported by
sub-
groups including safety, innovation, and supply chain
integration.
Simple mechanisms, such as the co-location of contractors and
'buddy partnering' encouraged the sharing of ideas and better
practices."

The upshot of this experiment, at least according to Johnson and
Elliott, has been a shift away from previous adversarial
relationships
and the secrecy, autarky, and opportunism characteristic of
those
arrangements, toward cooperation, resource sharing, and
collective
learning about better methods that save money. This, in turn,
produced substantial improvements in highway maintenance and
cost reductions of 20-40 percent (where partnerships operated
compared with matched sites where traditional contracting
mechanisms remained in effect).
Building Communities of Practice around Source Selection
To extrapolate cultivational governance from its source site to
our
target site, government acquisition officials would have to
establish
similar collaborative, developmental associations for the
industries
and trade groups that serve defense agencies. Together, a
contracting agency and the relevant association would develop
the
rules that would govern each source selection (subject, of
course, to
FAR/DFARS requirements), specifying the obligations of each
party,
their decision rights, and their responsibilities with respect to
the
following:
- Defining requirements of the good or service sought,
- Attracting proposals that address requirements adequately,

- Establishing criteria for evaluating proposals that reflect those
requirements,
- Deciding what constitutes a meaningful discussion,
- Obtaining price information,
- Conductingthe evaluation, and
- Complying with a schedule.
306 MASER fifTHOMPSOM
At each step in the source-selection process, participants would
be required to be fully transparent with respect to their
capabilities,
purposes and intentions. Following government's sourcing
decisions,
open forums would be held to discuss outcomes. In the interim,
members of associations would be obligated to report on their
operating practices and productivity and to hold regular
meetings to
discuss and debate those results. Another responsibility of
associations would be to socialize newcomers to the acquisition
enterprise and to a system of rules that would create and sustain
collective expertise and motivation. As Kramer and Lewicki
(2010)
explain: "Rules contribute to presumptive trust not only through
their
influence on individuals' expectations regarding other members'
behaviors, but also by shaping their expectations regarding their
own
behavior."

In addition to providing a basis for bridging trust, associational
activities could go a long way to putting governrrient and its
suppliers
on a more equal footing as participants in an on-going dialogue
about
products and operating processes and, thereby, to reducing
communication and performance failures, breaches of rules,
incongruent actions, and unwillingness to acknowledge
transgressions.
Why would businesses want to participate in these kinds of
associational activities? One answer is access to government
contracts. If most potential bidders voluntarily agreed to
participate,
government could exclude from competition those who refused
to do
so. But there is another equally compelling answer: faster
learning.
Participating businesses would acquire knowledge, which would
allow
them to increase profitability and turnover, to serve civilian
customers
better, and to contribute more effectively to the public welfare.
The downside of building communities of practice, modeled on
cultivational governance, around source selections is that they
would
undoubtedly be conducive to bid rigging. We believe it likely
that this
drawback would be more than offset by faster learning, product
and
operating upgrades, improvements in the execution of contracts,
and
reduced monitoring and enforcement costs.̂ '* Nevertheless, that
is by

no means certain. Consequently, what we propose here is a
formal
experiment that would test this scheme against the status quo.
To build trust, one must first give it.
ACQUISITION 307
NOTES
1. Execution of the acquisition function involves the following
processes, listed sequentially: procurement planning,
solicitation
planning, solicitation, source selection, contract administration,
and contract closeout (Rendon, 2008).
2. The Federal Acquisition Regulations (FAR) and the Defense
Federal Acquisition Regulation Supplement (DFARS) prescribe
the steps that acquisition officials must follow in making
source-
selection decisions.
3. Defense contracting is often the butt of public criticism,
notwithstanding careful analysis that presents a very different
picture of its effectiveness (see, for example, Besselman, Arora,
&
Larkey, 2000).
4. Obviously, we do not know if the following claim is true or
not, but
one of our respondents insisted that government and businesses
typically prepare for the worst: that agencies build three months
into their schedules for large contracts to account for bid

protests
and that companies build the expected cost of a protest into
their
overhead.
5. Our practical goal in writing this article is improving the
source-
selection process; our scholarly purpose lies in contributing to a
process theory for recovering and reinforcing trust. Trust has
long
been a focus of scholarship in our field, if not a major one.
Some
of the more prominent works on trust were authored by Perry &
Wise, 1990; Thompson, 1993; Behn, 1995; La Porte & Metlay,
1996; Ruscio, 1996; and Yang & Hölzer, 2006. One of the main
insights found in this literature is that institutional constancy is
a
critical requirement for sustaining trust, both in general (Miller
1993; La Porte & Keller, 1996) and specifically with respect to
public-private partnerships (Teisman & Klijn, 2002; Romzek &
Johnston, 2005). We take this conclusion as a given in the
discussion.
6. We make certain assumptions that should be made explicit:
negotiation is good, unproductive conflict bad; compromise is
good, intransigence bad. Note that we are most emphatically
NOT
saying that disagreement per se is bad. Disagreement can drive
creativity. If we value item A more than you do and you value
item
B more than we do, we disagree, but that's the basis for any
308 MASER öfTHOMPSOfi

productive exchange. We generally presume that contract
• negotiation is inherently a positive-sum game. If, in fact, the
source-selection process is inherently a zero-sum game, mistrust
is not a problem to be solved; it is a condition to be borne and,
where possible, its costs reduced. That is not our perspective,
although candor forces us to acknowledge that it may well be
correct.
7. It would be easy to document a widespread belief in the
incapacity and under capacity of the acquisition workforce,
especially during the last ten years when the volume of
contracts
increased and the number of people in the workforce remained
stable or declined. We might note that the differences observed
in
training, recruitment, and incentives in the various contracting
agencies provide a real opportunity for rigorous analysis of the
effectiveness of personnel practices and procedures. Maser,
Subbotin, and Thompson (2012), for example, claimed that the
personnel practices observed at the Naval Air Systems
Command
and the Defense Logistics Command are better designed to
insure competency than are those of other defense agencies.
They also show that the Naval Air Systems Command's and the
Defense Logistics Command's source-selection actions are less
likely to be protested and, if protested, more likely to prevail
than
are the actions of other defense acquisition agencies. The
problem with this analysis is that the assessment of personnel
practices is extremely informal and, even if that were not a
problem, correlation does not necessarily imply causation. We
need more rigorous programmatic analysis and evaluation to
draw strong conclusions about the relationship between
personnel practices and acquisition outcomes. But these results
suggest that investing in the right sort of experimentation and
evaluation might have a significant payoff.

8. Beyond the FAR, statutory guidance for peer review can be
found
in the appropriations rider to the Treasury and General
Government Appropriations Act for Fiscal Year 2 0 0 1 (Public
Law
1 0 6 - 5 5 4 ; H.R. 5658), section 515(a), which has come to be
known as the Information Quality Act. Implementation of this
statute by the Office of Management and Budget's (OMB)
Office
of Information and Regulatory Affairs (OIRA) has taken the
form of
"Guidelines for Ensuring and Maximizing the Quality,
Objectivity,
ACQUISITION 309
Utility, and Integrity of Information Disseminated by Federal
Agencies" (8452 Federal Register, Vol. 67, No. 36, Friday,
February 22, 2002). These OMB guidelines prescribe that
agencies covered by the Paperwork Reduction Act (44 U.S.C.
chapter 35):
[SJhall adopt a basic standard of quality (including
objectivity, utility, and integrity) as a performance goal
and should take appropriate steps to incorporate
information quality criteria into agency information
dissemination practices.... As a matter of good and
effective agency information resources management,
agencies shall develop a process for reviewing the quality
(including the objectivity, utility, and integrity) of
information before it is disseminated....This process shall
enable the agency to substantiate the quality of the

information it has disseminated through documentation
or other means appropriate to the information.
Subsequently, OMB has issued bulletins clarifying standards
and
operating procedures for information provision, including those
governing peer review.
9. Sampling aimed at finding the sources of errors and fixing
them
might be more effective. Certainly, that would be more
consistent
with the tenets of quality management. In the same vein, it is
likely that this program would be sounder and surer if peer
reviewers used a standard, comprehensive checklist. We don't
now know. Indeed, we have no hard evidence that this program
works at all. In this case, however, the Defense Department
Office
of Acquisition, Technology & Logistics is conducting a
thorough
evaluation of the efficacy of the peer review process and we
should soon have that evidence.
10. Indeed, that presumption is probably valid for the entire
acquisition community - suppliers and users, as well as buyers.
11.15.506 (d) At a minimum, the debriefing information shall
include— (1) The government's evaluation of the significant
weaknesses or deficiencies in the offeror's proposal, if
applicable;
(2) The overall evaluated cost or price (including unit prices)
and
technical rating, if applicable, of the successful offeror and the
debriefed offeror, and past performance information on the

3 1 0 MASER ÄTHOMPSOn
debriefed offeror; (3) The overall ranking of all offerors, when
any
ranking was developed by the agency during the source
selection;
(4) A summary of the rationale for award; (5) For acquisition of
commercial items, the make and model of the item to be
delivered by the successful offeror; and (6) Reasonable
responses to relevant questions about whether source selection
procedures contained in the solicitation, applicable regulations,
and other applicable authorities were followed.
12. If I think you ought to trust me, then I ought to trust you in
return.
Acts that are manifestly premised on trust tend to breed trust in
others.
13. Even doctors - once advised by counsel not to apologize to
patients for fear than an apology would be used against them in
a
lawsuit as an admission of guilt - are now being advised to
apologize when appropriate as a way of discouraging lawsuits.
14. One of the intriguing aspects of cultivational governance is
the
way it combines competition with close working relationships.
Most scholars have treated these as either/or propositions
(Williamson 1985; Thompson 1993; Brown, Potoski & Van
Slyke
2006), although practitioners evidently improvise similar
arrangements on a regular basis (Romzek & Johnston, 2005;
Werner & Hefetz, 2008; Kapstein & Oudot, 2009).
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Report to Congressional Requesters
United States General Accounting Office
GAO
February 2004
COMPETITIVE
SOURCING
Greater Emphasis
Needed on Increasing
Efficiency and
Improving
Performance
GAO-04-367
www.gao.gov/cgi-bin/getrpt?GAO-04-367.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact William Woods
at (202) 512-8214 or [email protected]
Highlights of GAO-04-367, a report to the
Honorable Robert C. Byrd, the Honorable
Susan M. Collins, the Honorable George
V. Voinovich, and the Honorable Henry A.
Waxman
February 2004

COMPETITIVE SOURCING
Greater Emphasis Needed on Increasing
Efficiency and Improving Performance
Since the President announced competitive sourcing as a
governmentwide
initiative, the six civilian agencies GAO reviewed created a
basic
infrastructure for their competitive sourcing programs,
including
establishing offices, appointing officials, hiring staff and
consultants, issuing
guidance, and conducting training. With infrastructures in place
and
leadership involvement, each agency has developed competitive
sourcing
plans and conducted some competitions. The Department of
Defense (DOD)
has had an extensive competitive sourcing program since the
mid-1990s.
Interagency forums for sharing competitive sourcing
information also have
been established.
While such activities are underway, each agency GAO
reviewed, including
DOD, cited several significant challenges in achieving its
competitive
sourcing goals. Key among these is maintaining workforce
inventories that
distinguish inherently governmental positions from commercial
positions—a
prerequisite to identifying potential positions to compete.
Agencies also have

been challenged to develop competitive sourcing approaches
that would
improve efficiency, in part because agencies have focused more
on following
OMB guidance on the number of positions to compete—not on
achieving
savings and improving performance. Ensuring adequate
personnel with
the skills needed to run a competitive sourcing program also
challenged
agencies. Many civilian department-level offices have only one
or two full-
time staff to interpret new laws, implement new OMB guidance,
maintain
inventories of competable positions and activities, and oversee
agency
competitions. The Federal Acquisition Council is currently
identifying
agency staffing needs to address this challenge. Finally, some of
the civilian
agencies we reviewed reported funding challenges in
implementing their
competitive sourcing programs. OMB told agencies to include a
line item for
competitive sourcing activities in their fiscal year 2005 budget
requests.
Several agencies integrated their strategic, human capital, and
competitive
sourcing plans—an approach encouraged by the Commercial
Activities
Panel, which was convened to conduct a congressionally
mandated study of
the competitive sourcing process. For example, the Internal
Revenue Service
(IRS) used business case analyses to assess the economic

benefits of various
sourcing alternatives. An IRS official said this approach
required minimal
investment to determine an activity’s suitability for competitive
sourcing.
The National Institutes of Health, the Army, and the Department
of
Education also took a strategic approach to competitive
sourcing.
OMB’s task in balancing the need for transparency and
consistency with the
flexibility agencies need is not an easy one. While OMB is
addressing funding
and human capital challenges, it needs to do more to assure that
the
agencies’ inventories of commercial positions and goal-setting
processes are
more strategic and helpful to agencies in achieving savings and
improving
performance.
In August 2001, the administration
announced competitive sourcing
as one of five initiatives in the
President’s Management Agenda.
Under competitive sourcing,
federal agencies open their
commercial activities to
competition among public and
private sector sources. While
competitive sourcing is expected to
encourage innovation and improve
efficiency and performance, it
represents a major management
change for most agencies.

This report describes the progress
selected agencies have made in
establishing a competitive sourcing
program, identifies major
challenges these agencies are
facing, and discusses strategies
they are using to select activities
for competition.
GAO is making three
recommendations to the Office of
Management and Budget (OMB) to
help agencies (1) ensure greater
consistency in classifying positions
as either inherently governmental
or commercial, (2) identify
functional areas for competition,
and (3) focus competition plans
more on desired outcomes.
OMB concurred with our
recommendations, but disagreed
with the conclusion that its recent
guidance emphasizes process more
than results. The seven agencies
GAO reviewed either agreed with
the report, had no comments, or
offered only technical revisions.
http://www.gao.gov/cgi-bin/getrpt?GAO-04-367

Page i GAO-04-367 Competitive Sourcing
Letter 1
Results in Brief 2
Background 4
Agencies Have Established a Foundation for Their Competitive
Sourcing Programs 7
Many Agencies Face Challenges in Implementing
Competitive Sourcing 11
Some Agencies Used Strategic Approach to Identify and
Prioritize
Activities for Competition 20
Conclusion 23
Recommendations for Executive Action 23
Agency Comments and Our Evaluation 24
Appendix I Scope and Methodology 26
Appendix II Guiding Principles for Competitive Sourcing 28

Appendix III 2002 FAIR Act Inventories 29
Appendix IV Competitive Sourcing Studies Initiated and
Completed in 2002 and 2003 30
Appendix V Disposition of Competable Commercial FTEs
Where Studies Completed 31
Appendix VI Evolution of OMB’s FAIR Act Guidance 35
Appendix VII OMB Scorecard Criteria for the Competitive
Sourcing Initiative 36
Contents

Page ii GAO-04-367 Competitive Sourcing
Appendix VIII Strategic Approaches to Competitive Sourcing
37
Appendix IX Comments from the Department of Health &
Human Services 44
Appendix X Comments from the Department of the Interior 45
Appendix XI Comments from the Department of Veterans
Affairs 47
Tables
Table 1: Overview of Civilian Agency Infrastructure
Development 8
Table 2: Timeline of Selected Competitive Sourcing
Initiative Events 14
Table 3: Disposition of 2002 Competable Commercial FTEs
Where
Studies Have Been Completed 31
Table 4: Disposition of 2003 Competable Commercial FTEs
Where
Studies Have Been Completed 33
Figure

Figure 1: Major Competitive Sourcing Phases and Related Tasks
17
Page iii GAO-04-367 Competitive Sourcing

Abbreviations
FAIR Federal Activities Inventory Reform Act of 1998
FTE full-time equivalent
HHS Health and Human Services
MEO most efficient organization
OMB Office of Management and Budget
VA Veterans Affairs
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Page 1 GAO-04-367 Competitive Sourcing
February 27, 2004
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Susan M. Collins
Chairman
Committee on Governmental Affairs
The Honorable George V. Voinovich
Chairman
Subcommittee on Oversight of Government Management,
the Federal Workforce and the District of Columbia
Committee on Governmental Affairs
The Honorable Henry A. Waxman
Ranking Minority Member
Committee on Government Reform
House of Representatives
The environment in which the federal government currently
operates—
with new security threats, demographic changes, rapidly
evolving
technologies, increased pressure for results, and growing fiscal
imbalances—demands that agencies engage in a fundamental
review of
how they accomplish their missions. Agencies increasingly rely
on a
range of technical and support services to meet mission
objectives. It is
important for agencies to decide how best to acquire and deliver
such
services, including whether to obtain services in-house or
through private
sources. One way to inform this decision is to use competitive
sourcing,
a strategy under which agencies open the government’s
commercial

activities to competition among public and private sector
sources.
United States General Accounting Office
Washington, DC 20548
In 2001, the administration identified competitive sourcing as
one of five
governmentwide initiatives in the President’s Management
Agenda.1 This
initiative seeks to expand competition between the public and
private
sectors to encourage innovation, increase efficiency, and to
improve
performance. But the use of public-private competition
represents a major
management change for agencies and has raised concerns about
the
fairness of the process and the potential impact on federal jobs.
Therefore,
after discussions with your staff, we agreed to (1) describe the
progress
agencies have made in establishing a competitive sourcing
program in
response to the President’s Management Agenda, (2) identify
major
challenges agencies are facing, and (3) identify strategies they
are using to

select activities for competition based on mission-related needs.
Our work focused on the initial implementation efforts of the
following
seven departments and the agencies within those departments
that have
the most developed competitive sourcing programs: Agriculture;
Defense;
Education; Health and Human Services (HHS); the Interior; the
Treasury;
and Veterans Affairs (VA). Together, these departments account
for about
84 percent of the commercial positions among the 26 executive
branch
agencies implementing the President’s Management Agenda.
For more on
our scope and methodology, see appendix I.
Each of the agencies we reviewed has laid the foundation for its
competitive sourcing program. The Department of Defense
(DOD) has had
an extensive competitive sourcing program in place since the
mid-1990s,
and all of the civilian agencies we reviewed have created a
basic
infrastructure for their competitive sourcing programs since the
President
announced competitive sourcing as a governmentwide initiative
in August
2001. In creating these infrastructures, agencies have
established offices,
appointed officials, hired staff and consulting contractors,
issued
guidance, and conducted training. With infrastructures in place
and

leadership involvement, each agency—defense and civilian—
has
developed competitive sourcing plans and conducted some
competitions.
At least two interagency forums for sharing competitive
sourcing
information also have been established.
1 The other four initiatives are strategic management of human
capital, improved financial
performance, expanded electronic government, and budget and
performance integration.
Results in Brief
Although agencies have made progress, they cited several
challenges in
implementing their competitive sourcing programs. Key among
these
challenges is developing workforce inventories that identify
commercial
and inherently governmental full-time equivalent (FTE)
positions.2
Agencies reported difficulty in classifying positions as
inherently
governmental or commercial and in applying guidance to
categorize
activities, making it challenging for agencies to identify
potential

candidates for competitions. While recent Office of
Management and
Budget (OMB) guidance has stressed that agencies should tailor
their
plans to meet mission needs, the emphasis in the guidance is
still more
on process than results. Agencies have focused on meeting
targets to
announce and complete competitions and have not assessed
broader
issues, such as weighing potential improvements against the
costs and
risks associated with performing the competitions.
Agencies also have been challenged to ensure they have
adequate
personnel with the skills needed to run a competitive sourcing
program.
Although DOD has a well-established management structure,
many civilian
department-level offices have only one or two full-time staff
members to
interpret new laws, implement new guidance issued by OMB,
maintain
inventories of competable positions and activities, and oversee
agency
competitions. According to a cognizant Army official,
implementation of
OMB’s revised guidance for competitions will require
approximately 100 to
150 additional personnel in the Army alone, including
attorneys, human
capital specialists, and contracting officials. Some of the
civilian agencies
we reviewed also reported funding challenges associated with
implementing their competitive sourcing programs.

Despite these challenges, several agencies have developed
strategic and
transparent competitive sourcing approaches by integrating their
strategic
and human capital plans with their competitive sourcing plans.
The
Commercial Activities Panel, which was convened to conduct a
congressionally mandated study of the government’s
competitive sourcing
process, supported use of this approach. Through broader
functional
assessments and comprehensive analyses that include factors
such as
potential savings, risks, current level of efficiency, market
conditions, and
current and projected workforce profiles, these agencies are
identifying
viable activities for competition.
2 Full-time equivalent (FTE) is a measure of federal civilian
employment. One FTE is equal
to 1 work-year of 2,080 hours.
We are making several recommendations to OMB to help
agencies
(1) ensure greater consistency in classifying positions as
inherently
governmental or commercial, (2) make more strategic and

transparent
sourcing decisions by identifying broader functional areas for
competition,
and (3) focus on efficiency and performance outcomes. We
provided a
draft of this report to OMB and the seven agencies for their
review and
comment. OMB concurred with our three recommendations, but
disagreed
with our conclusion that its recent guidance emphasizes process
more
than results. The Department of Agriculture and the Department
of the
Interior concurred with the report. The Department of the
Treasury said
the recommendations were timely and the remaining agencies
either had
no comments or offered only technical revisions.
Since 1955, the executive branch has encouraged federal
agencies to
obtain commercially available goods and services from the
private sector
when the agency determines that it is cost-effective. In 1966,
OMB
formalized this policy in its Circular A-76 and, in 1979, issued
a handbook
with procedures for determining whether commercial activities
should be
performed in-house, by another federal agency, or by the private
sector.3
Administrative and legislative constraints from the late 1980s
through 1995
resulted in a lull in awarding contracts under A-76

competitions. In 1995,
when congressional and administration initiatives placed greater
emphasis
on public-private competitions to achieve economies and
efficiency of
operations, DOD gave competitive sourcing renewed emphasis.
In our past
work, we have found that DOD achieved savings through
competitive
sourcing, although it is difficult to estimate precisely the
amount of
savings.4 By including competitive sourcing as one of five
governmentwide
initiatives announced in August 2001, the administration
directed agencies
to implement competitive sourcing programs to achieve
increased savings
and to improve performance. The administration continues to
advocate
the use of competitive sourcing, which is addressed in the
President’s
budget for fiscal year 2005.
3 OMB has updated this circular and handbook several times
since 1979. In May 2003, OMB
released a revised Circular A-76, which supersedes previous
versions of the handbook.
Office of Management and Budget, Circular A-76 (Washington,
D.C.: May 29, 2003).
4 General Accounting Office, Results of A-76 Studies Over the
Past 5 Years,
GAO-01-20 (Washington, D.C.: Dec. 7, 2000).
Background

Competitive sourcing has met with considerable controversy in
both the
public and private sectors. Each sector expressed concerned
that, in
general, the process was unfair and did not provide for holding
the winner
of the competition accountable for performance. In response to
this
controversy, in 2000, the Congress mandated a study of the
government’s
competitive sourcing process under A-765—a study conducted
by the
Commercial Activities Panel, chaired by the Comptroller
General of the
United States. The panel included representatives from OMB,
DOD, the
Office of Personnel Management, private industry, academia, a
trade
association, and unions. In April 2002, the panel released its
report6 with
recommendations that included 10 sourcing principles to
provide a better
foundation for competitive sourcing decisions in the federal
government
(see app. II). In particular, the panel stressed the importance of
linking
sourcing policy with agency missions, promoting sourcing
decisions that

provide value to the taxpayer regardless of the service provider
selected,
and ensuring greater accountability for performance. The panel
also
addressed an area of particular importance for all affected
the government’s sourcing policies are implemented. In this
regard, one of
the sourcing principles was that the government should avoid
arbitrary
numerical or full-time equivalent (FTE) goals. This principle is
based on
the concept that success in government programs should be
measured in
terms of providing value to the taxpayer, not the size of the in-
house or
contractor workforce.
The panel, in one of its 10 sourcing principles, also endorsed
creating
incentives and processes to foster high-performing, efficient,
and effective
organizations and continuous improvement throughout the
federal
government.7 On November 6, 2003, the Comptroller General
hosted a
forum to discuss what it means for a federal agency to be high-
performing
in an environment where results and outcomes are increasingly
accomplished through partnerships that cut across different
levels of
government and different sectors of the economy. There was
broad
5 Section 832, Floyd D. Spence National Defense Authorization

Act for Fiscal Year 2001,
P.L. 106-398 (Oct. 30, 2000).
6 Commercial Activities Panel, Final Report: Improving the
Sourcing Decisions of the
Government (Washington, D.C.: Apr. 30, 2002).
7 National Defense Authorization Act for Fiscal Year 2004,
Section 337, Public Law 108-136
(Nov. 24, 2003) directs the Secretary of Defense to implement a
pilot program under which
DOD organizations are provided incentives to re-engineer their
operations in order to
become high-performing organizations.
agreement among participants at the forum on the key
characteristics and
capabilities of high-performing organizations, which are
organized around
four broad themes. These four themes are (1) clear, well-
articulated, and
compelling missions; (2) strategic use of partnerships; (3) a
focus on the
needs of clients and customers; and (4) strategic management of
people.8
The competitive sourcing process starts with agencies
developing
inventories of their commercial positions in accordance with the
Federal

Activities Inventory Reform (FAIR) Act of 1998.9 Additionally,
OMB
requires agencies to identify activities that are inherently
governmental, as
well as commercial positions that are exempt from competition
because of
legislative prohibitions, agency restructuring, or other
reasons.10 Only
activities classified as “commercial” and not otherwise exempt
are
potentially competable. In the 2002 FAIR Act inventories,11 the
proportion
of competable commercial, non-competable commercial, and
inherently
governmental FTE positions varied widely among the agencies
we
reviewed. Governmentwide, competable commercial positions in
2002
accounted for approximately 26 percent of the total federal
workforce.
Except for the Education Department’s 62 percent, the
percentage of
competable commercial positions in each of our selected
agencies was
less than 50 percent of the agency’s total FTEs (see app. III).
After agencies identify competable commercial positions under
the FAIR
Act and OMB guidance, they select from these positions which
ones to
compete. Resulting public-private competitions are guided by
OMB
Circular A-76. In May 2003, OMB released a revised Circular
A-76. Under
this revised circular, agencies must use a standard competition
process for

functions with more than 65 FTEs. As part of the standard
process,
agencies identify the work to be performed in a performance
work
8 General Accounting Office, High-Performing Organizations
Forum: Metrics, Means,
and Mechanisms for Achieving High-Performance in the 21st
Century Public
Management Environment, GAO-04-343SP (Washington, D.C.:
Feb. 13, 2004).
9 P.L. 105-270 (Oct. 19, 1998).
10 An “inherently governmental” activity is an activity that is
so intimately related to the
public interest as to mandate performance by government
personnel. 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.
11 The 2002 FAIR Act inventories are the most currently
available data for most federal
agencies in our review.
http://www.gao.gov/cgi-bin/getrpt?GAO-04-343SP

statement, establish a team to prepare an in-house proposal to
perform the
work based on a “most efficient organization” (MEO),12 and
evaluate that
proposal along with those submitted by private companies
and/or public
reimbursable sources. For activities with 65 or fewer FTEs,
agencies may
use either a streamlined or standard competition. Streamlined
competitions require fewer steps than the standard process and
enable
agencies to complete a cost comparison more quickly.
When the President announced competitive sourcing as one of
five
governmentwide management agenda items in August 2001, few
agencies
other than DOD had an established competitive sourcing
infrastructure—a
key component of OMB’s strategy for institutionalizing
competitive
sourcing. Few of the other departments and agencies that we
reviewed
had competitive sourcing experience. Since that time, all six
civilian
agencies we reviewed have established a basic competitive
sourcing
program infrastructure. Leadership involvement and an
established
infrastructure have enabled each agency that we reviewed to
develop
competitive sourcing plans and complete a number of initial
competitions.
Interagency forums for sharing information also have been

established.
Although they lack DOD’s A-76 experience, the civilian
agencies we
reviewed have made significant progress toward establishing a
competitive sourcing infrastructure with such actions as
establishing an
office, hiring staff, obtaining contractor support, creating
policies and
procedures, and providing training to agency staff involved in
the
competitive sourcing process. Table 1 provides an overview of
civilian
agency infrastructure development.
12 OMB defines a most efficient organization (MEO) as the
staffing plan of the agency,
developed to represent the agency’s most efficient and cost-
effective organization.
Agencies Have
Established a
Foundation for Their
Competitive Sourcing
Programs
All Agencies We
Reviewed Have Made
Progress in Developing
Their Infrastructures

GAO-04-367 Competitive Sourcing
Table 1: Overview of Civilian Agency Infrastructure
Development
Then-year dollars
Structure and staffing Contract support
Policies, procedures, and
guidance Training and other resources
Agriculture
• Established competitive
sourcing office under the
Chief Financial Officer
• Two full-time staff
• $1.16 million in fiscal year
2002
• $8.68 million in fiscal year
2003
• Departmental guidebook and
brochures
• Departmentwide training
• Web site
Education
• Directed by Chief Financial
Officer as part of One-ED

approach
• Nine employee teams
assessed functions and
processes
• $1.87 million to prepare
business cases and
$456,000 for training and
support in fiscal years 2002
and 2003
• Primers on reengineering and
• 1-day training
• Consultants help teams
working on studies
Health and Human Services
• Directed by the Office of the
Assistant Secretary for
Administration and
Management
• Three full-time staff
• $7.6 million obligated for
competitive sourcing program
support and studies in fiscal
years 2002, 2003, and 2004
• Fact sheet on competitive
sourcing

• Policy letters issued and
comprehensive guidebook
developed
• Department holds monthly
outreach meetings with
operating division managers
• “All-hands” meetings to
discuss competitive sourcing
and A-76
• Web sites
Interior
• Directed by Center for
Excellence under the Deputy
Assistant Secretary for
Performance and
Management
• Two full-time staff
• As of September 26, 2003,
$150,000 for support of
Center for Competitive
Sourcing Excellence,
including training, FAIR Act
inventory and database
• Guidance on competitive
sourcing and labor-
management resolution on

• Leadership sent memoranda
on its commitment to
• Departmentwide competitive
sourcing workshop
• Governmentwide competitive
sourcing meetings and
conferences
• Web site with frequently
asked questions and
guidance
Treasury
• Directed by the Office of the
Deputy Assistant Secretary
for Management and Budget
• One full-time staff
• $1.9 million for training on
regulations, information
technology needs, and other
support services as of June
2002
• Office of the Procurement
Executive provided policy
guidance.
• Departmentwide conference

• Seminars and courses
• Encouraged attendance at
OPM and OMB training on
• Sponsors the Treasury
Acquisition Institute
Veterans Affairs
• Directed by Office of
Competitive Sourcing and
Management Analysis
Service under Office of
Policy, Planning, and
Preparedness
• Two Full-Time Equivalent
(plans to recruit at least one
analyst if requisite funds are
appropriated)
• In fiscal year 2003, VA spent
about $663,000 for support
items such as communication
strategies, a training module,
and a Web-based
competitive sourcing study

tracking system
• Departmental policy directive
• Competitive sourcing
handbook, communication
plan, and human resource
guidance pamphlet
• Training material developed,
but training not provided
because VA’s General
Counsel determined that use
of funds was prohibited by 38
U.S.C. 8110 (a)(5).
• Evaluation of pilot training
project for practitioners and
new hires
Source: Agency information.
In addition, DOD, which has the most competitive sourcing
experience in
the federal government, has issued numerous policies,
procedures, and
guidance for implementing OMB’s Circular A-76. DOD also has
established a management structure to oversee the department’s
A-76
activities.13 In carrying out its competitive sourcing program,
DOD uses
both in-house personnel and contractors to provide assistance
within the
department in developing performance work statements and
MEOs. In

response to our previous recommendation, DOD also has
established a
Web site14 to share competitive sourcing knowledge and
experience. This
Web site is available governmentwide.15 The site contains
resources such
as A-76 policy and procedures, best practices, sample
documents, bid
protests, and links to other sites with information on Circular
A-76.
The civilian agencies we reviewed completed their initial
rounds of
competitive sourcing studies in fiscal years 2002 and 2003 (see
app IV).
Based on data given to us by five of the six civilian
departments,16 602
studies were completed in fiscal year 2003. Of these 602
studies, 363 were
streamlined competitions and 130 were direct conversions to
performance
13 The Directorate of Competitive Sourcing and Privatization,
Office of the Deputy Under
Secretary of Defense (Installations and Environment) has
overall responsibility for
developing these major departmental documents. The Deputy
Under Secretary of Defense
(Installations and Environment) is the designated Competitive
Sourcing Official
responsible for implementing OMB Circular A-76 within the
department.
14 See http://emissary.acq.osd.mil/inst/share.nsf.

15 General Accounting Office, DOD Competitive Sourcing:
Lessons Learned System Could
Enhance A-76 Study Process, GAO/NSIAD-99-152
(Washington, D.C.: July 21, 1999).
16 The Department of Interior provided us only aggregated data
for 2002 and 2003. As a
result, we were unable to segregate the data for these 2 years for
inclusion in appendix V.
Studies Completed While
Infrastructures Were Put
into Place
http://emissary.acq.osd.mil/inst/share.nsf.
http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-99-152
by a contractor.17 In addition, DOD completed 126 studies,
including 54
direct conversions and 7 streamlined competitions.18
Collectively, these
studies involved over 17,000 FTEs, with almost 57 percent of
the FTEs
studied by DOD and the remaining 43 percent studied by the
civilian
agencies. According to agency data, in-house teams won many
of the
competitions, retaining almost 76 percent of the FTEs covered
by the
studies. (See app. V for details on the outcome of these studies.)

While
agencies have been able to complete these studies while
establishing their
infrastructures, it is too early to assess the impact of the studies
in terms
of efficiencies or performance improvements achieved.
A number of initiatives have been undertaken to share
competitive
sourcing information across agencies. In addition to DOD’s
Web site,
at least two interagency forums have been established to
facilitate
interagency information sharing. For example, staff working in
competitive sourcing offices in various agencies and
subagencies
meet monthly at the civilian agencies’ competitive sourcing
working
group to exchange ideas and information. The Federal
Acquisition
Council—composed of senior acquisition officials in the
Executive
Branch—also promotes acquisition-related aspects of the
President’s
Management Agenda by providing a forum for monitoring and
improving
the federal acquisition system. The Council has published a
guide on
frequently asked questions and a manager’s guide to
competitive sourcing.
In addition, OMB is developing a competitive sourcing data
tracking
system to provide consistent information and to facilitate the
sharing of

competitive sourcing information by allowing agencies to
identify planned,
ongoing, and completed competitions across the government.
According
to OMB officials, future refinements to the system may allow
agencies to
track and manage their own sourcing activities—a problem for
most
agencies—as well as provide OMB with consistent information.
OMB plans
to use the system to monitor agency implementation of the
competitive
sourcing initiative and generate more consistent and accurate
statistics,
including costs and related savings, for reporting to the
Congress.
17 While direct conversions were eliminated under the revised
circular, OMB granted
agencies permission to complete conversions initiated under the
previous circular.
18 These data cover studies completed through September 30,
2003. DOD studies may have
started prior to 2002.
Efforts to Share
Information across
Agencies

GAO-04-367 Competitive Sourcing
Despite their progress in establishing a competitive sourcing
infrastructure
and conducting initial competitions in varying degrees, the
agencies we
reviewed continue to face significant challenges in four areas.
First,
agencies have been challenged to develop and use FAIR Act
inventory data
to identify and group positions for competition. Second,
agencies are
operating in a continually changing environment and under
OMB guidance
focused more on meeting milestones rather than achieving
desired
outcomes. Third, agencies have reported that they lack the staff
needed to
carry out the numerous additional tasks required under the new
Circular
A-76. Finally, agencies have reported that they lack the funding
needed to
cover the substantial costs associated with implementing their
programs.
The development of accurate FAIR Act inventories is the
foundation for
determining which functions agencies compete. Agencies
reported
difficulty in classifying positions as inherently governmental or
commercial and in applying OMB-assigned codes to categorize
activities,
making it challenging for them to identify potential candidates
for
competitions. This has been a persistent problem as we have

reported in
the past.19 Despite changes made to OMB’s guidance for
constructing FAIR
Act inventories, the guidance has not alleviated the difficulties
some
agencies have had in developing and maintaining useful
inventory data.
Under the FAIR Act and OMB guidance, agencies annually
review and
classify positions as either inherently governmental or
commercial. This
classification process is done using an OMB-provided coding
schedule
containing nearly 700 functional codes in 23 major categories,
such as
health services, grants management, and installation services.
Civilian
agencies are having difficulty applying these functional codes,
which were
developed by DOD. While intended to promote consistency, the
codes are
not always applicable to civilian agencies, requiring some to
create
supplemental codes to match their missions.
19 Our prior work on this issue includes General Accounting
Office, Competitive
Contracting: The Understandability of FAIR Act Inventories
Was Limited,
GAO/GGD-00-68 (Washington, D.C.: Apr. 14, 2000); General
Accounting Office,
DOD Competitive Sourcing: More Consistency Needed in
Identifying Commercial

Activities, GAO/NSIAD-00-198 (Washington, D.C.: Aug. 11,
2000); and General
Accounting Office, Competitive Sourcing: Challenges in
Expanding A-76
Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 6,
2002).
Many Agencies Face
Challenges in
Implementing
Agencies Experience
Difficulties in Developing
Their FAIR Act Inventories
Classifying Positions as either
Inherently Governmental or
Commercial Is a Complicated
Process
http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-00-68
http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-00-198
http://www.gao.gov/cgi-bin/getrpt?GAO-02-498T
As we have previously reported, selecting and grouping
functions and
positions to compete can be difficult.20 For example, the Army
has
determined that many functions, such as making eyeglasses for
troops

located in a war zone, are core to its mission even though this
function
may not be classified as inherently governmental when
performed in the
United States. Also, some functions may involve both
“commercial” and
“inherently governmental” tasks. While agencies have had
difficulty
classifying mixed positions, OMB’s guidance allows agencies to
take a
variety of approaches to address this difficulty. For example,
according to
agency officials, the Internal Revenue Service classifies mixed
positions on
a case-by-case basis considering how critical the position is to
its mission,
not just the percentage of tasks related to that position that may
be
inherently governmental or commercial.
The process also can be resource intensive. For example,
according to
agency officials, to determine whether positions should be
classified as
inherently governmental or commercial, the National Park
Service—the
largest bureau in the Department of the Interior—used an
employee team
of approximately 30 individuals that represented all
occupational areas, as
well as its human resources and acquisition staff. The team used
the
analysis, in conjunction with payroll system data showing
employee time
usage, to determine the number of commercial and inherently
governmental FTEs.

Accuracy of inventories depends on agency classification of
positions,
based on OMB guidance, as well as consistent OMB review of
inventories.
OMB has updated its FAIR Act inventory guidance annually to
address
issues identified by agencies (see app. VI) and it consults with
agencies to
resolve issues identified. For example, in April 2001, OMB
created a new
requirement to report civilian positions designated as inherently
governmental. OMB’s guidance gives agencies considerable
latitude in
preparing their inventories to determine if an activity is
commercial.
OMB officials told us they have provided training on Circular
A-76
procedures to its budget examiners, who act as liaisons between
OMB and
each participating agency. The examiners address questions and
provide
guidance on an agency-by-agency basis. OMB does not have
formal written
20 General Accounting Office, Defense Management: DOD
Faces Challenges Implementing
Its Core Competency Approach and A-76 Competitions, GAO-
03-818 (Washington, D.C.:
July 15, 2003).
Agencies Concerned about
Consistency and Timeliness of
OMB Guidance

guidance for reviewing FAIR Act data. Examiners provide
verbal guidance
on an on-going basis to agencies and discuss concerns agencies
have with
the FAIR Act and the related competitive sourcing program.
Once agencies
submit their inventories, OMB officials review the inventories
looking for
“red flags”—that is, deviations from the norm, such as one
agency listing a
position as inherently governmental while others classify the
same
position as commercial—and then consult with agency officials
as
necessary on these deviations. However, a number of
officials at two interagency forums expressed concern about the
process.
For example, one official told us that an OMB program
examiner said
there were too many function codes in one agency’s inventory.
Then, after
the agency resubmitted its inventory, the same examiner said
the
inventory had too few codes. An official from another agency
told us that
its OMB examiners did not appear familiar with OMB’s own
guidance for

Turner, Robert W.. Supply Management and Procurement. Ft. Laud.docx

Turner, Robert W.. Supply Management and Procurement. Ft. Laud.docx

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