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The Defense Logistics Agency broke the rules when it tried to outsource out 12 employees' jobs without allowing the employees to compete against private contractors for the work, the Defense Department inspector general ruled this week.

In an Apr. 13 report (99-132), IG Eleanor Hill found that the agency violated Office of Management and Budget Circular A-76 guidelines and the 1995 Defense Appropriations Act, which do not allow an agency to contract out any function performed by more than 10 employees without a cost-comparison study. In such studies, the in-house employees develop a "most efficient organization" plan that essentially serves as a bid to keep their jobs. If their bid is less costly than private contractors' bids, the work stays in-house. If not, it is outsourced.

In May 1998, officials at the Defense Supply Center in Columbus, Ohio, determined that the center could save $102,638 over three years if it contracted out shuttle bus and taxi services, which were performed by 12 employees. But the center did not conduct a "most efficient organization" study to determine whether it could save as much money by reorganizing the in-house operations.

In June 1998, officials informed the employees who were going to lose their jobs that the decision to contract out was "a done deal," employees told IG investigators. Questioning the decision, the employees sent a memorandum to the IG's office and to Rep. John Kasich, R-Ohio.

In its investigation, the IG found that the center's "officials did not comply with guidance because they were not familiar with the legal and policy requirements for outsourcing commercial activities, and apparently misunderstood DLA management verbal directions not to engage in outsourcing actions until reengineering tasks had been completed."

Under Circular A-76, which governs public-private competitions, employees' views must be obtained during the cost comparison process. They must also receive periodic updates on the progress of the A-76 study.

The supply center's failure to follow proper procedures "adversely affected the working relationship" between management and employees, the IG found.

DLA agreed to suspend the outsourcing decision and re-study the shuttle service operations. The agency also pledged to involve employees in the public-private competition.