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Gao Insourcing Status Report 2009

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AccO<lnlBblilly • Integrity· Relleblilty

United States Government Accountability Office
Washington, DC 20548

October 6, 2009

Congressional Committees

Subject: Civilian Agencies’ Development and Implementation of Insourcing Guidelines
Federal agencies rely on a multisector workforce composed of federal employees and
contractor personnel to perform services as they carry out their missions. Determining
whether to obtain services through insourcing with current or new federal employees,
outsourcing with private sector contractors, or cosourcing with a combination of the two is
an important economic and strategic decision critical to the federal government’s effective
and efficient use of taxpayer dollars. The executive branch has encouraged federal agencies
since the mid-1950s to obtain commercially available services from the private sector when
outsourcing is cost-effective. In the last 5 fiscal years, civilian agencies have on average
annually obligated about $100 billion to obtain a range of services from contractors.
However, in March 2009, the President issued a memorandum on government contracting
that, among other matters, expressed concern about the federal workforce as to whether
agencies have become overreliant on contractors and have appropriately outsourced
services. In particular, the President noted that the line between inherently governmental
functions—those that must be performed by federal employees—and commercial activities
that may be contracted for has been blurred. In the memorandum, the President directed the
Office of Management and Budget (OMB) to lead a series of contracting-related efforts,
including clarifying when outsourcing for services is and is not appropriate.
Congress, also concerned with the federal workforce, in March 2009 enacted section 736 of
the Omnibus Appropriations Act, 2009, which requires federal agencies, with the exception
of the Department of Defense (DOD), to devise and implement guidelines for insourcing new
and contracted-out functions by mid-July 2009. The statute further requires that we report on
the implementation of section 736. In response, we identified (1) the actions taken by OMB to
assist affected agencies as they develop insourcing guidelines and (2) the status of selected
civilian agencies’ efforts to develop and implement insourcing guidelines.
To address our objectives, we interviewed and reviewed information provided by officials
from OMB and nine agencies on the status of their insourcing efforts pursuant to section 736.
The nine agencies were selected because they collectively accounted for about 80 percent of
the fiscal year 2008 funds obligated on service contracts by civilian agencies. In addition, we
reviewed OMB’s guidance issued in July 2009 as to whether it is consistent with statutory
requirements for executive agencies’ guidelines. We conducted our work from July 2009 to
October 2009 in accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate

Omnibus Appropriations Act, 2009, Pub. L. No. 111-8, Division D, Title VII, Section 736.
The nine agencies were the Departments of Energy, Health and Human Services, Homeland Security, Justice,
State, Transportation, and Veterans Affairs, as well as the General Services Administration and the National
Aeronautics and Space Administration (NASA).


GAO-10-58R Insourcing Guidelines

evidence to provide a reasonable basis for our findings based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for our findings based on our
audit objectives.
Results in Brief
Although section 736 does not specify a role for OMB in the development and implementation
of the civilian agency insourcing guidelines, OMB has initiated a number of efforts in
response to the President’s March 2009 memorandum on government contracting and section
736. In July 2009, after coordinating with key agencies, OMB issued guidance to facilitate the
management of the federal government’s multisector workforce through an approach that
(1) provides an initial framework for planning and managing the multisector workforce that
is built on strategic human-capital planning, (2) requires agencies to conduct a multisector
human-capital analysis pilot, and (3) provides criteria on how agencies can use insourcing as
a tool to manage their multisector workforces. Specifically, the insourcing criteria explain
what actions agencies are to take to ensure that they are giving “consideration” and “special
consideration” to the use of federal employees, as required under section 736. The OMB
criteria specify that agencies generally should conduct cost analyses as part of the insourcing
process but note that there may be circumstances where full cost analyses are unnecessary.
How cost analyses are to be conducted and what factors are to be considered in the analyses
are left to the agencies. OMB is considering what its future role regarding insourcing will be
but currently does not plan to formally approve agency insourcing guidelines. It does,
however, recognize that its insourcing criteria are likely to be the first step of an iterative
process that may be revisited periodically due to the complexity of addressing the
multisector workforce, possible changes resulting from its review of the term “inherently
governmental,” and lessons learned from the multisector workforce pilots.
None of the nine civilian agencies we visited met the statutory date for developing and
implementing their insourcing guidelines and procedures. Although one agency issued
preliminary guidelines, and two others had drafted but not issued their guidelines as of our
review, most of the agencies’ efforts are still in their early stages. Agency officials told us that
they delayed their efforts to develop or issue guidelines as they were waiting for OMB’s July
guidance to ensure their guidelines were consistent, and some officials noted that they are
waiting on additional direction from OMB, particularly as it relates to the definition of
inherently governmental functions and when it is appropriate to outsource. Agency officials
also identified a number of challenges relating to insourcing such as the complexity of the
issue within the broader context of managing the multisector workforce, the time and level of
effort involved in coordinating relevant agency functions, and continued uncertainty about
the meaning of key terms, such as “consideration” and “special consideration.” Agency
officials also made some suggestions, such as multiagency working groups to share lessons
learned, that they believe may help them in their future insourcing efforts. OMB advised us
that the working group on multi-sector workforce management will provide ongoing support
to agencies and that OMB will continue to provide information to agencies in response to
We provided a draft of this correspondence to OMB for its review and comment. OMB
provided technical comments that we incorporated into the final version as appropriate.
Additionally, the nine agencies we met with were given the opportunity to provide comments
on a fact sheet containing information from a draft of this correspondence specific to their
agency. Seven of the agencies had no comments on the information in the fact sheets and two
agencies provided technical comments that have been incorporated into this

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Section 736 of the Omnibus Appropriations Act, 2009, requires the heads of executive
agencies, except DOD, subject to the Federal Activities Inventory Reform (FAIR) Act of 1998
to devise and implement insourcing guidelines and procedures by July 9, 2009. The statute
specifies that the guidelines and procedures are to ensure that “consideration” is given to
using, on a regular basis, federal employees to perform new functions and functions that are
performed by contractors and could be performed by federal employees. The statute further
requires that the guidelines provide for “special consideration” to be given for using federal
employees to perform any function that is


performed by a contractor and
• has been performed by federal employees at any time during the previous
10 years;
• is a function closely associated with the performance of an inherently
governmental function;
• has been performed pursuant to a contract awarded on a noncompetitive basis; or
• has been performed poorly, as determined by a contracting officer during the
5 years preceding the date of such determination, because of excessive costs or
inferior quality; or
a new requirement, with particular emphasis given to a new requirement that is
similar to a function previously performed by federal employees or is a function
closely associated with the performance of an inherently governmental function.

In addition, the statute provides that the guidelines and procedures may not include any
specific limitation on the number of functions or activities that may be converted to
performance by federal employees and excludes certain functions from public-private
competition until certain conditions are met.
Section 736 does not apply to DOD. However, section 324 of the National Defense
Authorization Act for Fiscal Year 2008 provided essentially the same requirement for DOD to
develop and implement insourcing guidelines. In April 2008, DOD issued its initial insourcing
guidelines. Then on May 28, 2009, DOD issued implementing guidance for the insourcing of
contracted services. The May 2009 guidance explains that it is designed to assist DOD
components as they develop and execute plans to decrease funding for contract support and
increase funding for approximately 33,400 new civilian manpower authorizations. Among
other matters, the guidance provides a process the components are to follow in prioritizing
and reviewing contracted services for possible insourcing and the steps they are to follow
once the decision is made to insource a function.
In March 2009, the President issued a memorandum that identified a number of concerns
related to government contracting, explicitly noting that government outsourcing for services
raises special concerns. The memorandum directed the Director of OMB, in collaboration

The FAIR Act of 1998, as amended (31 U.S.C. § 501 note), requires agencies to submit annual workforce
inventories of activities that are not inherently governmental functions. Executive agencies subject to the FAIR
Act include executive departments, such as the Department of Homeland Security, and independent
establishments, such as NASA.
Section 736 provides that the term “inherently governmental functions” has the same meaning as that in subpart
7.5 of the Federal Acquisition Regulation (FAR), which includes extensive lists of examples of functions
considered to be and not be inherently governmental functions. Although section 736 does not specifically refer to
it, FAR subpart 2.1 defines “inherently governmental function” to mean “as a matter of policy, a function that is so
intimately related to the public interest as to mandate performance by government employees” and “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.”
National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181 § 324.
DOD Memorandum, In-sourcing Contracting Services – Implementation Guidance (May 28, 2009).
Presidential Memorandum, Government Contracting, 74 Fed. Reg. 9,755 (Mar. 4, 2009).

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with heads of executive agencies and other officials, to develop and issue by July 1, 2009,
governmentwide guidance to assist agencies in reviewing and creating processes for ongoing
reviews of existing contracts to identify contracts that are wasteful, inefficient, or not
otherwise likely to meet the agency’s needs and to formulate corrective actions. Noting that
agencies must operate under clear rules, the President’s memorandum further directed that
by September 30, 2009, OMB issue guidance to clarify when governmental outsourcing for
services is and is not appropriate.
OMB’s Insourcing Efforts and Criteria
Although section 736 of the Omnibus Appropriations Act, 2009, did not specify any
responsibilities for OMB, the office has taken actions to assist agencies in the development of
their insourcing guidelines within the context of providing overall guidance on managing the
multisector workforce. On July 29, 2009, OMB issued guidance in response to the President’s
memorandum as well as section 736 that addresses achieving the best mix of contractors and
federal employees and requires agencies to begin the process of developing and
implementing policies, practices, and tools for managing the multisector workforce. The
memorandum outlines a three-prong approach that (1) provides an initial framework for
planning and managing the multisector workforce built on strategic human-capital planning,
(2) as part of a planning pilot, requires each agency to conduct a multisector human-capital
analysis of an organization, program, project, or activity where there are concerns about
reliance on contractors and report on the pilot in April 2010, and (3) provides criteria on how
agencies can use insourcing as a tool to manage their multisector workforce. Also, as part of
this guidance, OMB discussed its efforts to review the definition of an inherently
governmental function within the context of its efforts to clarify when governmental
outsourcing for services is and is not appropriate.
The insourcing criteria issued by OMB in July 2009 are intended to provide the civilian
agencies with a framework for consistent and sound application of the statutory
requirements as the agencies develop their insourcing guidelines. OMB developed the criteria
in consultation with a working group composed of officials from some of the affected
agencies. According to a senior OMB official, OMB established four agency working groups
to address specific issues related to the President’s March 2009 memorandum. He explained
that the working group responsible for addressing multisector workforce issues helped to
develop the insourcing criteria since OMB considers insourcing one of many tools available
to manage the multisector workforce. OMB also involved DOD in its efforts to develop
criteria, in part to benefit from DOD’s experience in developing and implementing insourcing
guidelines and to promote consistency across all agencies.
OMB’s July 2009 criteria generally address the provisions of section 736 and provide a general
framework for agencies to craft their own insourcing guidelines. The criteria consist of four
sections that address different aspects of the statute and describe circumstances and factors
agencies should consider when identifying opportunities for insourcing. See table 1 for a
description of OMB’s insourcing criteria.


Other agency heads include the Secretary of Defense, the Administrator of NASA, the Administrator of the
General Services Administration, the Director of the Office of Personnel Management, and other heads of agencies
the Director of OMB deems appropriate.
OMB Memorandum M-09-26, Managing the Multi-Sector Workforce (July 29, 2009).
OMB’s multisector workforce memorandum notes that this review is consistent with section 321 of the Duncan
Hunter National Defense Authorization Act for Fiscal Year 2009, Pub. L. No. 110-417 (2008), which requires OMB
to review the definitions of “inherently governmental function” and develop a single consistent definition for the
These four working groups were set up to address (1) the definition of the term “inherently governmental,”
(2) managing the multisector workforce, (3) contractor inventories and information, and (4) cost determination.

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Table 1: OMB’s Criteria for Insourcing under Section 736
Key sections

Agency responsibilities/actions and factors to consider

General Management


Consideration of
Federal Employee



review contractor performance on an ongoing basis and where a determination is
made that contractors are performing inherently governmental responsibilities,
insource such work on an accelerated basis
monitor internal human-capital capacity to minimize the risks associated with
overreliance or improper reliance on contractors
ensure that there are sufficient resources to manage and oversee contractors
augment existing management reviews when appropriate, to consider and
evaluate opportunities to improve performance with the use of federal employees
o evaluations should
consider opportunities for new and already-contracted work
generally include a cost analysis that addresses the full cost of
performance and provides “like comparisons” of relevant costs to
determine the most cost-effective source of support
situations when insourcing may be justified without a full cost analysis:
o to establish or build internal capacity or maintain control of an agency’s
mission and operations;
o to perform a function that is closely associated with an inherently
governmental function and in-house performance is necessary for an agency
to maintain control of its mission and operations; or
o to avoid the compromise of a critical agency or administration policy

Consideration of
Federal Employee


go beyond existing agency management reviews and evaluate the specific
function to be performed prior to the pursuit or nonpursuit of a contract action
o key issues and actions for evaluations
if an agency determines that contractor performance causes the agency
to lack sufficient internal expertise to maintain control of its mission and
operations, then the agency is to take actions to obtain needed in-house
if a preliminary analysis suggests that public-sector performance is more
cost-effective and it is feasible to hire federal employees for a particular
function, the agency is to initiate a more-detailed analysis of insourcing
extent of analysis should generally be commensurate with the
size and complexity of the function in question and its
importance to the agency’s mission
cost analysis should address the full costs of government and
private-sector performance
insourcing should not be used unless performance and risk
considerations in favor of federal employee performance will
clearly outweigh cost considerations



reiterates restriction in section 736 from conducting public-private competitions
under OMB Circular A-76 as a prerequisite to federal performance of certain

Source: OMB.

According to a senior OMB official, OMB is considering what its future role regarding
insourcing will be. For example, OMB currently does not plan to formally approve agency
insourcing guidelines but will likely play an ongoing policy role in future insourcing efforts.
He added that OMB could possibly be involved through the agency working groups, but its
specific role and extent of involvement will depend on the evolving nature of the issue. OMB
recognizes that its insourcing criteria are likely to be the first step of an iterative process and
expects to periodically revisit the guidance due to the complexity of addressing the
multisector workforce in an ever-changing environment and culture, the need for clarification
on the meaning of terms such as “inherently governmental,” and the fact that OMB’s efforts,
as well as those of the civilian agencies, are in early stages. OMB also anticipates gaining
further insight about insourcing, including an assessment of data needs, from the pilot
studies required under the broader OMB guidance for managing the multisector workforce.
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Status of Selected Agencies’ Insourcing Guidelines
None of the nine civilian agencies we visited met the statutory requirement to develop and
implement insourcing guidelines and procedures by July 9, 2009. To date, one agency—the
Department of State—has issued what department officials characterized as “preliminary”
guidelines in late July 2009 and plans to revise its guidelines as insourcing efforts evolve.
Officials with the remaining eight agencies informed us that they have efforts underway to
develop insourcing guidelines. However, these eight agencies are at various stages of
developing their guidelines. For example, two agencies recently designated the offices
responsible for leading the effort to develop the guidelines and are in the process of deciding
what approach they will take. In contrast, two other agencies have drafted guidelines, with
one waiting on management approval to issue them and the other planning to finalize its
guidelines once OMB issues additional outsourcing guidance. Table 2 gives the status of the
nine agencies’ efforts to develop and implement insourcing guidelines pursuant to section
Table 2: Status of Nine Selected Agencies’ Development of Section 736 Guidelines

Status as of September 30, 2009

Department of

Guidelines drafted but not issued. Expected issuance date October 16, 2009,
but may change based on when OMB issues additional guidance, which was
due September 30, 2009.

General Services

Guidelines not drafted. Initial draft expected in October 2009.

Department of
Health and Human

Guidelines not drafted. Plan to draft based on additional OMB guidance and
experiences with pilot study.

Department of
Homeland Security

Initial incremental guidelines drafted. Expected issuance upon management

Department of

Guidelines not drafted. Established a working group to draft insourcing
guidelines and procedures. Draft due November 30 and will be finalized by
January 30.


Drafting interim guidelines. Expected issuance at the end of October 2009.

Department of

Preliminary guidance issued on multisector workforce requirements on July
30, 2009. Detailed insourcing guidelines will be issued after pilot study is
concluded in April 2010.

Department of

Guidelines not drafted. No timeline given.

Department of
Veterans Affairs

Guidelines not drafted. Initial draft expected in early fiscal year 2010.

Source: Cited agencies.

Officials with the nine agencies cited a number of reasons as to why they did not meet the
statutory deadline and have not issued final insourcing guidelines. These reasons included,
but were not limited to the following:

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Wanting to ensure their guidelines were consistent with OMB’s guidance, which was
not issued until July 2009, which caused them to delay either finalizing or drafting
their guidelines.
Waiting for additional OMB guidance and clarification regarding outsourcing and
inherently governmental functions, which was to be provided by September 30, 2009.
Several officials stated that they anticipate this guidance will have a significant effect
GAO-10-58R Insourcing Guidelines



on their development and implementation of insourcing guidelines. Similarly, OMB
indicated when it provided the insourcing criteria in July 2009 that it expected to
refine the criteria as it developed guidance on when outsourcing is and is not
Intending to use the results, best practices, and lessons learned from the multisector
workforce pilots to better inform their insourcing guidelines and procedures. For
example, one agency plans to use its experience with the pilot as the basis for its final
guidelines, while another plans to issue initial guidelines to be used during the pilot
and then revise the guidelines as appropriate based on the experiences during the
Stressing that developing effective insourcing guidelines is complex and involves
many agency functions, including human capital, acquisition, and finance and budget,
all of which requires a great deal of coordination and takes time. They added their
ability to focus on the development of the guidelines has been constrained by their
capacity to deal with multiple management initiatives in addition to their regular core

Insourcing Challenges
Agency officials we met with noted that while the process of developing insourcing
guidelines can be complicated, the broader issue of insourcing within the context of
managing the multisector workforce is complex and involves many challenges. According to
agency officials, the complex nature of insourcing and the many functional parts of an agency
that are involved require managers to share responsibility and coordinate activities. The
various functions that will be involved in an agency’s insourcing efforts—such as human
capital, acquisition, finance and budget—must be identified, as well as the roles each will
play. Officials also stated that once identified and given roles, the functions must then work
together to identify and resolve matters such as the types of services and number of positions
to be insourced; the hiring timeline for federal employees; training and security clearance
needs; budget needs for additional resources; facilities and equipment needs; and oversight
needs and capacity. According to agency officials, another challenge of insourcing is that it
represents a major shift in the focus and culture of the multisector workforce. Established
processes and procedures are geared toward outsourcing 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 an agency within an ever-changing
environment. In addition to these overarching challenges, agency officials identified the
following issues that may affect their insourcing efforts:



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Continued uncertainty as to what is meant by terms used in section 736 and OMB’s
criteria such as “inherently governmental,” “mission-critical,” “core competency,” and
“consideration” versus “special consideration” makes it difficult to address them in
agency guidelines. However, officials we spoke with were not always in agreement
regarding the need for and level of specificity for some terms, as some officials
preferred having greater flexibility in interpreting and applying the terms.
Confusion as to when a cost analysis is needed and the appropriate procedures to
conduct one makes it hard to define what procedures are necessary to sufficiently
address the cost issue. OMB’s criteria do not specify the procedures for conducting a
cost analysis or define what constitutes full cost of performance. While some agency
officials thought there should be standard cost-analysis procedures, officials with at
least one agency preferred more flexibility in determining how it should conduct cost
analyses when making insourcing decisions.
Difficulty in gathering and analyzing certain types of service-contracting data needed
for making insourcing decisions. For example, information on the type of service
contracts and the number of contractor-equivalent personnel may not be readily
available, even though some officials indicated that such information may be needed
to review contracted-out services and make insourcing decisions. Although one
GAO-10-58R Insourcing Guidelines


agency had already issued a data call for specific service contracting information and
was in the process of analyzing the data, others indicated that they are waiting for the
pilot programs to help them identify what data best inform the insourcing decisionmaking process.
Limited budgets and resources may constrain insourcing efforts. For example, if after
applying its guidelines, an agency determines that a function should be insourced and
additional government employees need to be hired, the agency must ensure the funds
are available to pay for them. There may also be a significant time lag between the
decision to insource and the process for reprogramming funds in an effective and
timely manner.

While agency officials cited many challenges to insourcing, they also offered suggestions that
they said may help them in their efforts to address these challenges and shift the culture.
These suggestions included OMB convening ongoing, multiagency working groups to
encourage agencies to work together by sharing lessons learned and providing each other
examples of how to work through both the development and implementation phases of
insourcing plans and having a point of contact within OMB for insourcing information. In
response, OMB advised us that the standing working group on multi-sector workforce
management will provide ongoing support as the current special working groups complete
their tasks and that OMB is continuing to provide information to agencies to address their

We are sending copies of this report to the Director of OMB; the Secretaries of Energy,
Health and Human Services, Homeland Security, State, Transportation, and Veterans Affairs;
the Attorney General; the Administrators of the General Services Administration and NASA;
and interested congressional committees. In addition, the report will be available at no
charge on GAO’s Web site at
If you or your staff have any questions concerning this report, please contact me at (202) 5125274. Contact points for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Key contributors to this report include Johana R. Ayers,
Assistant Director, Marie Ahearn, Greg Campbell, Mary Jo Lewnard, Rae Ann Sapp, and
Viraphonh Vongvanith.

John K. Needham
Acquisition and Sourcing Management

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List of Committees
The Honorable Daniel K. Inouye
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable David R. Obey
The Honorable Jerry Lewis
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable Joseph I. Lieberman
The Honorable Susan M. Collins
Ranking Member
Committee on Homeland Security and Governmental Affairs
United States Senate
The Honorable Edolphus Towns
The Honorable Darrell Issa
Ranking Member
Committee on Oversight and Government Reform
House of Representatives


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