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CONTRACTING-OUT PROCEDURES

TUESDAY, AUGUST 8, 1961

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ARMED SERVICES,
SUBCOMMITTEE FOR SPECIAL INVESTIGATIONS,

Washington, D.C. The subcommittee met at 10:10 a.m., Hon. F. Edward Hébert (chairman of the subcommittee) presiding.

Mr. HÉBERT. The committee will be in order.
The chairman desires to make the following statement.

This morning we commence with the Department of the Army and will follow with the Department of the Navy and the Department of the Air Force, in our procurement study of a system which has the popular title of “contracting out.” For definition we refer to an area which deals primarily in services performed by civilian contractors for the different services.

This subject sometimes leads into broad questions of policy per se. But the subcommittee's interest is not with policy but with practice and how the practice in given areas affects the capabilities, readiness, and efficiency in the performance of total military missions and, of equal importance, the cost of one practice versus another. It is, therefore, to questions of capabilities and cost that we address ourselves.

Contracting out takes many forms. We shall consider some, but not necessarily all, of the types of services for which contracts are let; and we will concern ourselves, in part, with the transfer of services formerly performed by the military to civilian contractors.

In the field of equipment maintenance, we will have to consider whether or not the services performed contribute to the readiness posture and capabilities of the services, particularly in emergencies.

Next, we will consider some of the things for which the services have contracted; as to whether or not they are or should be within the capabilities of the military themselves.

I think that this statement outlines, as briefly as is possible, the scope of this hearing.

These contracts are sometimes spoken of as "think" contracts. But on inquiry, we find a word has been coined; they are "effort contracts." We shall not, in the first instance, consider the capabilities of the “think” factories themselves, but we shall consider the subject matter of these contracts given out to civilian contractors. We will learn that these contracts must be asked for by the name "effort" because they have no end product; perhaps, not even a conclusion.

Now, we will discuss some of these subjects with the Department of the Army.

Now, Mr. Courtney, you have some witnesses?

Mr. COURTNEY. Mr. Chairman, Mr. Ignatius, the Assistant Secretary of the Army, is here. He has a prepared statement and he is to be followed by General Bunker, addressing themselves to the whole scope of the committee's inquiry.

Mr. Ignatius has a prepared statement, and under the rules may he proceed without interruption and in order?

Mr. HÉBERT. Without objection, the biographical sketch of Mr. Ignatius will appear in the record at this point.

(The biographical sketch of Mr. Ignatius is as follows:)

BIOGRAPHY OF HON. PAUL R. IGNATIUS, ASSISTANT SECRETARY OF THE ARMY

(INSTALLATIONS AND LOGISTICS)

Paul R. Ignatius was born in Los Angeles, Calif., in 1920. He attended public schools in Glendale, a suburb of Los Angeles. In 1942, he received an A.B. degree with honors from the University of Southern California, and was elected to Phi Beta Kappa.

During World War II, Mr. Ignatius served as a lieutenant in the Navy, principally as an aviation ordnance officer aboard the carrier Manila Bay, in the Pacific. For a brief period of time he was a member of a staff responsible for preparing a comprehensive manual for the Navy's Bureau of Supplies and Accounts.

In February of 1947, Mr. Ignatius was awarded the degree of master in business administration from Harvard University. In the following 3 years he served as a research assistant and as an instructor in business administration at Harvard. He resigned from the Harvard staff in 1950 to form, with two of his Harvard Business School associates, the management consulting and research firm, Harbridge House, Inc.

During the 11 years since its founding, Mr. Ignatius played a major role in the development and expansion of Harbridge House. A great part of this effort was devoted to consulting and research in military supply and procurement, and in the procurement responsibilities of a large segment of defense industry. Among the major projects he undertook were the planning and establishment of the Army Management School at Fort Belvoir and the Army Logistics Management Center at Fort Lee. In 1957 he was responsible for the preparation of a comprehensive analysis of the supply systems of the three military departments in connection with the Department of Defense's logistics system study project.

Mr. Ignatius bas lectured at the Army War College, the Industrial College of the Armed Forces, and the Foreign Service Institute. He has also taught courses in defense industry procurement for the University of California and Fordham University. From time to time he has published articles on management and logistics subjects.

Mr. Ignatius was appointed Assistant Secretary of the Army (Installations and Logistics) on May 22, 1961. In this capacity, his responsibilities include: procurement and production including procurement policy ; logistical single manager activities and material management including storage, distribution, maintenance, and disposition; communications, medical, transportation, and other service activities of the technical services; materiel and materials requirements and industrial mobilization; military assistance program (exclusive of financial management); industrial labor relations; military construction; command, industrial and civil real property; management and engineering at industrial facilities and logistical installations; physical security of industrial facilities; Alaska Communication System; and housing and public quarters.

In 1947 Mr. Ignatius married Nancy Sharpless Weiser of Holyoke, Mass. They have four children: David, 11; Sarah, 9; Amy, 7; and Alan, 2.

Mr. IGNATIUS. Thank you, Mr. Courtney.

Mr. Chairman, and members of the committee, we appreciate the opportunity of discussing with the committee the Army's policy for “contracting out.” This is, of course, an area of considerable interest throughout the Army and one which must be considered in many of our major decisions. Since the subject matter covers an extremely

wide spectrum of activities, I will restrict my comments to major areas of interest.

Basically we contract out for any of three general reasons: either it is required by a directive; it results from an internal improvement plan or change of mission; or it arises from a lack of inhouse capacity—due either to lack of á facility, or lack of people of appropriate skill. On the other side, some of what we do inhouse results from a lack of commercial capacity.

In 1953, the Office of the Secretary of Defense first published Directive 4100.15 which stated that the policy of the administration was to use Government-owned and operated commercial and industrial type facilities only where it could be clearly demonstrated that private enterprise could not perform the service or provide the product necessary to meet current and mobilization requirements, or that operation by the Government was necessary in the execution of the military mission.

Under the impetus of this directive, Department of Defense began the survey of certain specified categories of activities in 1954. In 1955, Bureau of the Budget published Bulletin 55-4 (revised in 1957 as BOB Bulletin 57-7), prescribing an administration policy similar to that already in effect in the Department of Defense.

Under these directives, the Army surveyed 650 commercial-industrial-type activities and, as a result, closed and curtailed over 150 of them. An example of the categories surveyed in the initial survey and one rather clear-cut result of this program concerns Army bread bakeries.

Early in the program, the Office of the Secretary of Defense designated military bread bakeries as a "commercial-industrial-type activity” subject to the policy requirements of the Bureau of the Budget bulletins. Extensive studies were made of the 31 Army bakeries in the continental United States in 1955. The elements considered in these studies were:

(a) The need to maintain a rotation base for military specialists required to operate bakeries in oversea areas.

(6) Overall costs including, in addition to labor and materials, charges for overhead and utilities services.

(c) Comparisons of costs of military production against prices of commercial suppliers. Although specific cost data contained in the 1955 reports no longer are available, the studies indicated that costs for Army-produced bread ranged from considerably less to approximately the same as bread procured from local commercial sources.

Upon review of the reports and recommendations submitted by the Army, the Office, Secretary of Defense, approved continuation of 14 of the 31 bakeries surveyed. One of these was to be used for the training of career enlisted bakery personnel and the other 13 for rotation of enlisted bakery specialists to and from oversea areas. Thus, 17 bakeries were closed as a result of this program. However, since Army bread bakeries were, and now are, operated almost exclusively by enlisted military personnel, very few civilian employees were affected by the closings and the Army was able to utilize the enlisted military personnel formerly engaged in bakery operations for more essential military activities.

Only 13 bakeries now are operated at continental U.S. Army installations, due to changed requirements. These bakeries meet the criteria for continued operation and are the minimum number necessary for training and the specialist rotation support program.

More recently, in 1959, BOB Bulletin 60-2 was published as a revision and expansion of the two preceding bulletins. Under this expanded program, Department of the Army reviewed and evaluated an additional 1,284 activities. Of the activities evaluated, all were approved for continuance at the previous level except six approved for discontinuance and nine for curtailment. Even these decisions were not a direct result of the Bureau of the Budget bulletins, but rather a result of separate Army actions in the management of its operations.

I think it might be well to point out that BOB Bulletin 60-2, as well as previous policy issues related to commercial-industrial activities, did not require that decisions as to the discontinuance or curtailment of Army facilities be based on cost alone. Of far more importance and value to the Army were the provisions that decisions might be based on:

(a) National defense requirements, such as the training of military personnel to insure combat readiness, and

(6) Infeasibility of procurement from commercial sources because of the clear relationship of the activities to the basic missions of the Army or the administrative impracticability of contracting

out. Practically all of the decisions made by the Army in the latest survey of commercial-industrial activities were based on one or the other of these two criteria.

In 1960, the Office of the Secretary of Defense published DOD Directive 4151.1 which applied the reasoning of the Bureau of the Budget bulletins to the materiel maintenance area. It, in fact, posed no new requirement for the Army because it did little more than prescribe for the Department of Defense a policy already in effect in the Army.

The actions which have resulted from BOB Bulletin 60-2 and DOD Directive 4151.1 have not been significant since both only required us to reexamine policies which had been in effect for a significant number of years prior to their publication.

So much for external directives. Of far more consequence to the Army in the area of "contracting out” or otherwise reducing our requirement for personnel is our own internal improvement actions.

As in the other military departments, the Army strives constantly to get the most defense out of the dollar and personnel limitations a particularly true cliche. We constantly look for ways in which we can save time, improve management or reduce requirements so that we can do the best possible job within the funds and personnel ceilings which we have. And I would say that the Army is doing an excellent job of distributing its limited resources toward meeting its requirements.

One example of an Army internal program is the depot improvement plan which was implemented in fiscal year 1961. The basic concept is that we should have only that storage space required for our present

are

and mobilization requirements, located where required to fulfill apparent missions, present or future.

Though easy to state in simple terms, this is a tremendously complex problem. The result of the plan to date has been a phased program for deactivation, reduction or consolidation of depot activities throughout the continental United States. The plan is, of course, constantly under study and the results in each fiscal year are dependent upon the progress of the plan at that time.

It is apparent that such a plan as this, though not directed by anyone outside the Army, has an immediate, but not specifically determinable impact on personnel, yet it is mandatory if we are to apply our resources to the best possible advantage.

In production-type military overhaul, we supplement our inhouse capability by contract facilities, and have since 1948. One factor considered in contracting out overhaul is the inability of the Army to perform the service because of a lack of facilities or a shortage of required skills. Weaponry changes are so rapid that often we find it uneconomical to invest the time and funds in training or facilities necessary for maintenance even though the weaponry is combat related. There are, in fact, decided advantages to contracting in some areas. As a general rule, contractors are used for overhaul when

(a) Workloads in support of mission-essential equipment exceed the established capacity of depot maintenance activities.

(6) Workloads in support of nonmission-essential equipment.

(c) Complex new mission-essential equipment is introduced into the inventory for which a depot maintenance capability has

not been achieved. As a result of these policies, approximately 14 percent, or $22 million, of the $155 million depot maintenance overhaul program was accomplished by private industry in fiscal year 1960. Of this amount $16.5 million was for aircraft maintenance; the remainder was spent for the overhaul of engineer construction, marine, and rail equipment, and missile secondary items. A small amount of electronic equipment also is programed for overhaul by contract in fiscal year 1961. I will discuss engineer construction, marine and rail equipment maintenance briefly. You will note that much of the equipment in these categories is essentially commercial-type and obtaining a source of contractual assistance is no problem.

The contracting policies for engineer equipment have enhanced our mobilization readiness position. During the past 13 years, contractual relationships have been established with over 250 firms, any one of which could be activated on short notice under emergency conditions. Due to low workloads, only 35 of these contractors are presently engaged in the overhaul of Army engineer equipment, supplementing the inhouse capability which we must retain.

Marine craft maintenance is accomplished by contract facilities with the exception of one inhouse facility maintained at Charleston, S.C. This one capability has been retained primarily as a mobilization base and accomplishes maintenance on mission-essential equipment in the Charleston area to insure an operating workload. Since commercial repair facilities are readily available, it is more economical to contract

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