Myths and Realities: The Outsourcing Debate

T he release on April 30 of the congressionally mandated Commercial Activities Panel report marked yet another step in a long and heated debate over the degree to which the government is-or should be-relying on the private sector for the delivery of services. Last year, the issue almost brought down the Defense authorization bill and was the focus of a failed attempt to amend a major appropriations bill.

Outsourcing has already been the focus of several contentious hearings this year. One was even scheduled to coincide with the federal unions' national legislative conferences. Entertaining as theater, the hearings have been sorely lacking in terms of substantive discussion. Outsourcing was the subject of a radical amendment (that was withdrawn) in the House Armed Services Committee on May 1, and more hearings loom.

Despite the importance of the issue, thoughtful discourse has become almost impossible. Instead, we are treated to a seemingly endless litany of myth and misperception.

PEOPLE PROBLEMS

As the report of the Commercial Activities Panel states, the government faces daunting human capital challenges:
  • Difficulties competing with the private sector in hiring and keeping people with critical skills.
  • An extraordinary wave of retirements-roughly half the federal workforce will be eligible to retire over the next several years.
  • A failure to adequately invest in and otherwise support employees.
The link between those problems and outsourcing is inextricable, but too often discussed in a vacuum. For instance, as the private sector has learned, outsourcing need not diminish a company's success in recruiting and retaining a high-quality workforce. Indeed, job guarantees in the private sector are nonexistent and competition is a constant. Yet good companies succeed in their efforts to win the fierce competition for talent.

Their success is tied to a range of factors, including compensation, incentives and rewards for high performance, robust investment in professional and career development, and focusing resources on core missions and the people that perform them. Organizations can recruit effectively, even when job security is nonexistent, if their human resource practices reflect the view that the workforce is is a critical asset and should be treated as such, even when outsourced.

On every one of those counts, the government lags far behind. That is a significant reason surveys conducted after Sept. 11 show a newfound appreciation for the role of civil servants, but reflect no discernible increase in those willing to work for the federal government.

The government has increasingly relied on the private sector for technology solutions over the last 20 years. But it continues to perform functions involving hundreds of thousands of jobs that are, by definition, commercial in nature and not "core" to an agency's mission. Instead of figuring out how to capitalize on new technologies and solutions to drive optimal performance, and in the process, doing right by the federal workers who might be affected, outsourcing opponents focus on keeping work in-house and "in-sourcing" already contracted work at any cost. Rather than embracing the central role that competition plays in driving optimal performance, the importance of linking agency core missions, the realities of the human capital challenge, and the potential offered by the marketplace, foes of outsourcing seek instead to turn back the clock. Playing on fears and offering a litany of unsubstantiated allegations, these critics have shifted the debate from substance to sound bites, fact to mythology.

IN THE SHADOWS

The dominant mythology is encompassed by the term "shadow workforce." The term refers to all nonfederal workers (contract employees, university and other grant recipients, and state and local government workers) performing work on behalf of the federal government. It has grown out of The True Size of Government (Brookings Institution Press, 1999), a book by the Brookings' Paul Light. In discussing the growing use of nonfederal employees to provide federal services, Light writes that the government has "pushed jobs outward and downward into a vast shadow that is mostly outside the public's consciousness."

It is true the public might not be aware of the extent to which government services are performed by nonfederal workers. Citizens are focused more appropriately on the quality of those services. And no one can argue that a mix of sources is responsible for delivering government services. Light appropriately reminds us of the disingenuousness of the decades-old practice of politicians who boast they have shrunk the government by cutting the federal workforce. The size of government, as Light correctly suggests, is not a function of the number of federal employees; it is a function of total mission and budget.

But the term "shadow workforce" suggests some secretive cabal operating without constraint. Foes of outsourcing claim the "shadow workforce" has grown like the most virulent of weeds. They routinely decry the supposed evisceration of the federal workforce in favor of contractors. They claim contractors lack accountability and that there is a lack of fair competition for the work they perform. The size of the shadow workforce means the government somehow has lost control of itself, critics say, and doesn't, in Light's words, "do enough." They act as if the private sector is nothing more than a sometimes necessary evil, rather than a partner with which the government can work to improve and optimize its performance.

There has been much speculation about the size of the shadow workforce-with the most commonly cited figure being Light's 5.6 million workers. Other analyses, particularly those done by the Defense Department and the Army and based on a variety of contract data, suggest that the correct number is actually a fraction of that amount.

Light's researchers derived their numbers by using the Commerce Department's Regional Input-Output Modeling System, a tool used by economists to estimate the regional impact of everything from building a new school to relocating a factory. It estimates not only the jobs directly created, but those in the surrounding economy as well. The model works well as a tool for measuring the total impact of government contract dollars. But it does not measure the size of the contractor and subcontractor workforce. Light acknowledges this in his book, when he points out that the numbers reflect "direct and indirect" employment-a far broader economic impact-driven by the award of government contracts. Others, however, have chosen to spin the research differently.

Nonetheless, driven by the mythology, some say the government needs to know exactly how many nonfederal employees are working for it. But such numbers are not truly meaningful. The government should know whether it has outsourced functions that are inherently governmental, just as it needs to know what functions it is performing internally. But when a company outsources a function, it cares little about the number of people employed by its contractors. What does matter are total cost and performance. Sourcing processes are strategic management tools; counting heads, or imposing arbitrary limits on government jobs, are not.

CHECKS AND BALANCES

Implicit in the mythology as well is the suggestion that the government would operate more accountably without contractors. But government contracting is chock full of checks and balances to ensure accountability. Chief among those checks is continual competition. According to the Federal Procurement Data System, nearly 80 percent of all procurements for services, and more than 90 percent of information technology contracts-the fastest-growing areas-are awarded competitively. And in some areas new rules are being put in place to ensure even greater competition.

Contractors are continually rated on their performance, and their future government business opportunities often hinge on their previous performance. They can be terminated for failure to perform. Their spending can be audited against a detailed set of government accounting rules and is completely visible because the government buyer must approve every invoice.

Yet one need only read recent reports from the General Accounting Office, the Senate Governmental Affairs Committee, the independent Center for Naval Analyses (CNA) think tank, and the Commercial Activities Panel report to be reminded of government's management challenges, ineffective financial management systems, inaccurate cost analyses, and lack of flexibility in its administration of the civil service system.

In the critical area of cost alone, GAO has stated the problem bluntly: The government "lacks a cost accounting system to measure actual costs," Barry Holman, GAO's director of defense capabilities and management, told the House Government Reform Technology and Procurement Policy Subcommittee in June 2001. And in a February 2001 study, "Long-Run Costs and Performance Effects of Competitive Sourcing," CNA sought to assess the long-term costs associated with some 50 outsourcing decisions but was unable to find the data needed to assess the work being performed internally. Meanwhile, CNA found that work that is contracted out is generating ongoing savings of more than 30 percent, a finding consistent with those by GAO and others. Accountability cuts both ways. But the mythology portrays it as a one-way street.

LESS ISN'T MORE

Finally, the mythology also purports that over the last decade, the government has radically downsized its workforce and arbitrarily shifted massive amounts of work to the private sector. Yet, overall, no significant correlation exists between increased outsourcing and a reduced federal workforce. More than 90 percent of downsizing over the last decade took place at the Defense Department, yet roughly 60 percent of the increase in outsourcing occurred at civilian agencies, according to the Federal Procurement Data System and the Congressional Budget Office. At civilian agencies, service contracting has risen by 33 percent, but the workforce has been cut by only 3 percent. Service contracting at the Defense Department has increased only 14 percent, while the workforce has been cut by almost 32 percent, primarily as a response to the end of the Cold War and base closures. Moreover, the data actually show that in many areas where there has been the greatest downsizing, there have also been reductions in contracting, and vice versa.

The extent to which the sourcing debate is being shaped by mythology is striking. That might serve the political purposes of some, but the taxpayers, the government, its employees and its customers pay the price. The late Sen. J. William Fulbright once warned of the danger of making policies "based on old myths rather than current realities." We would do well to follow his advice. To do otherwise will ensure that we continue down the road of spiraling rhetoric and diminished results.


Stan Soloway is president of the Professional Services Council, the principal national trade association of professional and technical services firms supporting the government. Previously he served as deputy undersecretary of Defense in the Clinton administration and as a member of GAO's Commercial Activities Panel.
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