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their own capabilities in these areas. While they acquiredADP equipment from private industry, agencies generally usedGovernment personnel to operate and manage these facilities,and Government persoI!nci did most systems analysis, systemsdesign, and programing.Through the years, an ADP industry has been developing;today there are many firms that provide services which theGovernment could, an6 to some extent already does, utilize.Services offered by the firms include computer time, timesharing services, management consulting, programing, systems analysis, systems design, facilities management, andtraining. Companies vary in size, number of employees, areasof specialization, and types of services offered, and, therefore, in their near-term capability to meet Governmentneeds.Today, although it makes some use of these firms, theGovernment maintains an inventory of over 11,000 computersand employs thousands to perform ADP-related functions.Estimates of the Government's annual ADP costs run as highas 15 billion.SCOPE OF REVIEWWe made this review to assess the reasonableness ofthe Government's Circular A-76 policy as it relates torelying on private industry for ADP services. Specifically,we:-- Evaluated OFPP's proposed guidance to agencies forcomplying with national policy in meeting ADPrequirements.-- Interviewed management officials in 31 privatesector organizations to learn (1) the extent thatthey relied on the ADP services industry and (2)their plans to satisfy future ADP needs.-- Sent 500 questionnaires to ADP firms located in43 States and the District of Columbia.(Seeapp. II for a copy of the questionnaire withselected responses summarized.)-- Held discussions with officials of 10 Federalagencies about the use of commercial sources fortheir data processing requirements.2

The nationwide questionnaire provided us data from alarge segment of the industry. It covered a wide range ofsubjects, including (1) willingness to provide services toavailable,the Government, (2) kind and extent of services e services to the Government.3

CHAPTER 2NEED FOR FURTHER GUIDANCE ON APPLICATIONOF CIRCULAR A-76 POLICY TO ADP ACTIVITIESThe Office of Federal Procurement Policy plan forapplying Circular A-76 to the Government's ADP needs isto shift attention from in-house operations and servicestoward increased reliance on private industry. Althoughthe ADP services industry is large, the information returnedon our questionnaire led us to conclude that the industrycomprises only a few large firms and many small 3nes. Thesmaller companies constitute a major segment of the industry,and their responses to our questionnaire show several factorswhich inhibit tileir readily offering services to the Gove. nment. Additionally, comments from the industry addressedthe complexity of the ADP services issue and suggested th!atit be given further study ard evaluation Prior to formulatingsupplemental guidance to Circular A-76.In our opinion,OFPP's approach needs to recognize the short-term limitationsof industrial capability, or the advantages OFPP envisionsfor both Government and industry will not be realized.ACTION TO PLACE GREATER RELIANCEON PRIVATE INDUSTRY FO ADPREQUIREMENTSOFPP's objective is to increase Pgencies' reliance uponcommercial ADP sources, whenever possible. To accomplishthis, OFPP has drafted planning and management guidelinescalling for each agency to initiate a positive action program to ensure that the policy and requirements o? CircularA-76 are fully implemented. The guidelines would :.ncludesuch matters as (1) review and revision of agency directivesto incorporate A-76 requirements and (2) preparation ofmultiyear plans to include a schedule of actions with milestones to achieve greater reliance on the private sectorfor ADP services. (See app. I for a copy of the most recentdraft of the guidance made available by OFPP.)Circular A-76's basic policy is to rely on the privateenterprise system to supply the Government's needs except whenit is in the national interest for such needs to be provided in-house. One of the circumstances cited in the circular for the Government's providing such services in-houseis when procurements from commercial sources would result inhigher costs to the Government. Thus, economy is a key factor in choosing between in-house or commercial resources.4

In our opinion, OFPP should consider cost and industrycapability in finalizing and issuing supplementalguidanceto Circular A-76 for two reasons. First, our discussionswith officials of many of the companies we visitedclearlyshowed that they find it more beneficial to havemosttheir ADP services done in-house by their own staffs. ofInthis respect, commercial practice is similar tothat ofmany Federal agencies. Second, the responses toour auestionnaire showed that only a limited number ofADP servicefirms currently have the capability to assume th envisioned for them by OFPP. Thus, an attempt to roleadditional major segments of the Government's ADP movements to commercial firms in a short time may be reauirecounterproductive. These points are discussed in thefollowingsections.Commer:ial organizations' ADP practicesare similarto Governmen practicesTo learn why and to what extent commercial organizationsrely on contracted ADP services, we interviewedmanagementofficials in 31 private sector organizations whichat one time seriously considered or evaluated using,use, orcommercial ADP services. These organizations, locatedinsixeastern and midwestern metropolitan areas, hadannual operating budgets racging from 6 million to well over 1 billion.Most of the organizations operate internal ADPfacilitiesproviding 75 percent or more of their total ADPOfficials from these organizations expressed the requirements.opinion thatthe benefits of in-house operations generally outweighthoseof relying on commercial ADE service firms.Of the 31 firms interviewed, only 2 firms' officialsstated they meet all of their requirements fromsources and only 2 indicated they provided 100 outsidePercent oftheir ADP services in-house.We obtained information about the number of personnelemployed in ArP activities by these 31 firms.Of the twocompanies meeting all their requirements from outsidesources,only one had no XtP personnel on its rolls. Thesizesofthe ADP staffs for the remaining 30 firms wereas follows:5

Number of ADP personnelemployedUnder251 351 601 901 1,001 OverNumber of firms2503006009001,0001,2001,2002013300330In selecting organizations for interviews, we intentionally sought firms that employed large numbers, as well asthose that employed small numbers, of ADP personnel toobtain a wide spectrum in terms of size and magnitude ofADP activity.Many of these firms had established policies relatingto the use of commercial ADP services, and these policiesconsidered factors, such as those shown below.Circumstances under whichcommercial ADP sources are usedNumber of firms (rote a)When in-house staff lacked required expertise14When in-house resources arefully utilized10To acquire developed systems,applications, or programs(e.g., payroll, accountsreceivable, accounts payable,and inventory control)12Other10a/Some of the firms had multiple reasons for usingcommercial ADP sources.Of the 29 firms that did use outside sources, weasked if cost analyses had been made to determine whetherservices should be provided in-house or obtained fromexternal sources. Twelve firms indicated they did makecost analyses; ten had found it more cost advantageousto stay in-house generally; one concluded it was sometimes6

advantageous to use outside sources; and one found noappreciable difference. Even though it was determined tobe generally cost advantageous to perform work in-house,a decision to do the work outside could be made for oneof the reasons cited in the table above. Officials ofseveral organizations interviewed told us they plan tomeet even more of their ADP needs through internal resourcesin the future.Disadvantages in using commercial services cited by theofficials included:-- Management tends io lccsof its operation.control over Part or all-- Contracting requires more administrative effortand resources.-- Services are not always provided on a timely basis.Overall, however, the officials were satisfied with those&DP services they did obtain from external sources.Few firms could currently assumer2jor segments of the Government's ADP needsOFPP officials believe that the ADP industry, althoughrelatively new, now has the capability of providing much ofthe ADP needs of Government and has the flexibility toexpand as needed. Our analysis of the 348 questionnaireresponses also points out that, given sufficient time, adequate capital, and qualified *,ersonnel, the firms couldmeet much of the Government's needs. However, within asingle year, only a limited number of firms could read.lyprovide large quantities of service.Several factors limit the firms' ability to providemore ADP services to the Government in the near future.-- Limited capacity.-- Lack of capital for expansion.-- Lack of qualified contracting personnel.7

Limited capacityOf the 348 firms responding to our questionnaire, 218(63 percent) had 50 or fewer full-time ADP employees.Inour opinion, many Federal agency ADP requirements wouldneed to be segmented or specially structured into smalltasks for this size of firm to be capable of responding toagency procurement efforts. The number of people employedby firms responding to the questionnaire is shown below:Number of employeesNumber of firms1 - 2021 - 5051 - 100Over 100Not disclosedin response116102497011Total348Two skill areas needed to meet Federal agencies' ADPservices requirements are analysts and programers. Thequestionnaire data revealed that many of the firms have onlylimited numbers of full-time employees in these two skillareas, as indicated in the following graphs.8

220200 -FIRMS REPORTINGFULL-TIME .404150511-6061-7714631606001-100 OVER 100FULL-TIMEAWiALYSTS200FIRMS REPORTINGFULL-TIME PROGRAMERS1881601S0140U.0 PROORAMERS9716081-906401-100 OVER 100

Thus, of the 245 firms reportinq the employmentofanalysts, 189, or over 77 percent, employed 10or fewerfull-time analysts. Of the 277 firms reportingment of programers, 188, or nearly 68 percent. the employhad 10or fewer full-time programers. This data seemsrelate with the statement by many of the firms to cora limited quantity of staff-years could be made that onlyavailablefor programina and systems analysis within thenext 12months.We asked the firms to estimate the quantity ofservices they could provide the Government duringthe next12 months. The following table summarizes theirstatedcapability for programing and systems analysisservices.Staff-years availablefor Government workin the next 12 months01 6 21 51 Over52050100100Number of firms bytype of service (note ome firms provide both programing and systemanalysis/design services.As shown above, many firms couldsmall amountsof services, but their capability wouldProvidebeinsufficienttofill the needs of many Government aqencies.Significantly,96 respondents said that they could not Provideany programing or systems analysis during the next year.Lack of capital for expansionA number of the respondents were small- or medium-sizefirms with ADP revenues of less than 5 millionannually,and many stated they would have difficulty expanding.Ninety-nine firms said the lack of capital affectedtheirability to provide more services. Eighty-fiveofthefirmshad revenues of less than 5 million. Typical oftheircomments were:-- The capital markets have all but disappeared,especially for small firms.10

--Capital for small- to medium-size ADP servicefirms is a constant problem.-- Capital for expansion in the ADP service businesswill be difficult to obtain for small firms.Lack of qualified contractingpersonnelMany of the ADP service firms indicated that they hadfew, if any, employees knowledgeable about complex Government contract procedures. Over 25 percent of the firmsresponding said they had never provided Services to theGovernment for this reason.An official of a management consulting firm specializingin computer service industry activities advised us thatGovernment agencies wishing to buy ADP services from a smallor medium-size firm need to change their procurement processes to make the entrepreneur:"* * * feel that (1) he is welcome ind (2) he hasa chance. The Government must recognize thatthese companies have neither the time nor theresources to comply with the myriad difficultiesnormally encountered with submitting * * *proposals and cost justifications required bygovernment * * *."Difficulties in this area had been encountered bysome of the firms queried.Forty-nine firms said they nolonger provide services to the Government because:-- Bidding procedures required too much effort.-- They experienced too many problems with Governmentcontracts (poor specifications, leadtimes, paymentschedules, etc.).--The profit margins were too 'ow.Other concerns voiced by the respondents were:"Excessive work is involved in making a Governmentbid.It often seems a waste of time to respondto solicitations.""Most small ADP companies do not have the timeto spend on learning all that is needed to bid on11

Government work. The time can better be spent ondeveloping commercial accourts.""Because of our size, we have difficulty obtaininglarge Government contracts when competing aqainstindustry giants.""Smaller firms (less than 25 million) cannotspend the time and dollars to submit proposals."Several of the larger firms in the ADP industry alsoexpressed concern about the Government's placing increasedreliance on the commercial sector.Excerpts of their comments follow and point out both that the issue is complexand that the most cost-effective solution would reauirecareful weighing of the alternatives available.One very large respondent indicated the issue:"* * * is not very different from the 'make or buy'decision normally made by private enterprise.The essential point is that EDP [electronic dataprocessing] suppliers offer a wide variety of different methods of achieving the same data processingresult. For example, many solutions may be implemented solely by software, by a software and hardware combination, by a redesign of the hardwareconfiguration through the application of systemsanalysis/design services, by the use of timesharing services, by the sharing of time on anotherFederal agency's computer system, and the listgoes on and on."The Federal Government has long been a leader andinnovator in the use of EDP techniques and has reliedextensively on the private sector for EDP equipmentand services. A great deal of time and effort has beenexpended to develop a higher [sic] competent groupof computer professionals. The investment in peopleand resources has greatly assisted the Government inmanaging its problems and constitutes an importantasset to the Federal establishment."We fully subscribe to Government policy of relianceon the private sector for its goods and servicesand feel in the EDP area there has been substantialcompliance with the policy. There ace areas, however,where greater emphasis could be placed on contractingfor certain types of EDP services. The most important12

factor we believe is the maintenance of a balancebetween thcse activities which can be contractedout and EDP activities which should continue to beperformed in-house, either because of the natureof the EDP service itself or the need for theGovernment to retain direct control of missionessential support functions."A trained and qualified staff capable of understanding the system in sufficient detail towrite and evaluate competitive functional specifications will be required in order for the agencyto compete effectively against outside services,The staff should maintain technical proficiency inorder to keep abreast of the rapid technologicalchanges which characterize the EDP industry so theagency can recommend and approve changes in systemhardware and software."A presumption that either outside contracting orin-house preformance is the least expensive methodto provide an EDP service runs counter to soundmanagement practice. Without cost studies of thevarious alternatives available for satisfying anEDP requirement, an agency could incur unnecessarilyhigh risks and obligations."Another commented that:"Implementation [of the policy] will take strongdirection from OMB. Budget redirection to [contractual services] with [a] resultant reductionof agency manpower on a programmed basis [wouldbe necessary]. Short of that, agencies will maintain and increase in-house personnel."13

CHAPTER 3PROPOSED GUIDANCE COULD HAVE ADVERSE IMPACTSeveral items in the Proposed OFPP guidelines couldadversely affect Government ADP operations, as well asprivate industry. The supplemental guidance would greatlyreduce the requirement for comparative cost studies. Onthe other hand, the low cost thresholds for triggeringcost studies, as now set forth in A-76, could cause bothagencies and industry considerable problems when makingminor changes to existing ADP operations. Finally, thesupplemental directive includes no crit-ria or guidancefor evaluating proposals responding to functional or servicetype specifications; and there is no requirement to analyzewhat impact a shift to private industry would have onGovernment employees, equipment, and software.LIMITED REQUIREMENTS FOR COST COMPARISONSCircular A-76 states that it is the Government'spolicy to rely generally on the private sector for goodsand services, and a cost comparison analysis is notrequired if an agency decides to use contractors. Thisposition is reiterated in the proposed OFPP guidelinesfor agencies in meeting their ADP requirements.In a January 7, 1976, letter to the Administratorif OFPP, we stated that obtaining goods and services atthe lowest possible cost is a sound public policy; weindicated our agreement with the need to keep the expenseand delay involved in making cost studies to a minimum,but we also pointed out that without making cost comparisons, the risk of selecting an uneconomical alternativewill be greatly increased. This point was specificallymade by a number of the firms responding to our questionnaire.(See p. 12 for one such view.)LOW COST THRESHOLDSWhile cost comparisons are key elements in determiningwhether work should be contracted out or performed in-house,such s

the automatic data processing area. The delay provides an opportunity to assess the impact of changes in the basic circular on methods for meeting agency automatic data processing requirements and determining what additional guidance might be needed for implementing Circular A-76 in this area. GAO suggests that, once the basii Circular