By Brian Friel
February 1, 1997
hen the corner grocery store needs to hire a cashier, the process is simple. The owner puts a "Help Wanted" sign in the window. People come in, fill out applications, and attend interviews. The owner hires someone. It takes a day or two.
When a commissary, a military-run grocery store, needs to hire a cashier, the rules of the civil service system apply. It takes four to eight weeks to hire a cashier. So there are longer lines at the commissaries because there aren't enough cashiers, and the system faces higher costs brought on by a cumbersome hiring process.
The Defense Commissary Agency (DeCA), which runs the military's worldwide commissary system, wants to hire cashiers like supermarkets hire cashiers, without all the excess paperwork and layers of bureaucracy. It also wants more say in how it trains, pays, rewards and punishes employees once they're hired.
And personnel management isn't the only area in which the commissaries want to become more business-like. The agency would like to change the way it ships its groceries, plans its budget, procures its equipment, and manages its accounting and information systems. Defense Department regulations now require other DoD agencies to perform many of the support services on which commissaries rely. DeCA is challenging its relationship with the Defense Finance and Accounting Service, the Defense Logistics Agency, the Defense Information Systems Agency, and the Defense Transportation Service. DeCA is a big customer for those agencies, and as the first Defense agency to argue that departmentwide services are overpriced, it challenges their business base. A successful challenge probably would hasten the trend toward new types of arrangements for administrative services in the government--through competition among federal service providers and private suppliers.
And so, with its thrust for independence within the Defense Department, and its push for civil service and other waivers, the commissary agency is making a bold dash for freedom that could blaze a trail for many other government agencies.
The model DeCA is using to reform its business practices is the so-called performance-based organization, or PBO, an initiative endorsed by Vice President Al Gore last March. In October, President Clinton announced his support. "We want hundreds of organizations to become performance-based, to be trailblazers in increasing productivity and making their customers happy," Clinton said.
DeCA will be the first.
As a trailblazer of reform, DeCA will experiment with Gore's challenge to the commissary agency and seven other pilot performance-based organizations to learn how to operate like profit-driven businesses, albeit without the profit. Gore's plan is to take those agencies whose functions can be tied to performance measures including service, efficiency, and cost, and make the heads of those agencies directly accountable to those measures.
The director of DeCA can't wait.
In February 1996, a month before the vice president announced the initiative to the public, DoD Comptroller John Hamre asked Army Maj. Gen. Richard Beale, DeCA's director, for his reaction to the PBO idea. Beale could barely restrain his excitement:
"Sir, I'm sitting on the edge of my seat waiting for the go-ahead," he said.
For Beale and his agency, the PBO approach offers a golden opportunity to prove that the federal government can efficiently run a commissary system that's been decried as an inefficient way of subsidizing military personnel. After all, why should the government be selling groceries?
The Commissary System
Walk into any commissary and you'll wonder why it's called a "commissary"-it's a supermarket, just like any outside the gates of the base. Only military personnel, retirees and their families can shop there all the time, and reservists have limited access. But the cereal, milk, cookies and bread are stocked onto shelves in long aisles, just like a supermarket. The cash registers look just like the ones at Safeway.
The commissaries pride themselves on their modernity and cleanliness, even compared to private supermarkets "downtown," or off base. Commissary customers are more interested in the prices, however. All items are sold at cost, plus a 5 percent surcharge. There is no tax on commissary purchases. An independent price comparison for DeCA in 1996 estimated that commissary shoppers save 29.7 percent on their grocery bills annually by taking advantage of low commissary prices. So it isn't surprising that commissaries were picked as the top nonpay military benefit in a 1995 survey of commissary customers; health care ranked second.
Commissaries are different from exchanges or PXs. Commissaries are run by DeCA, sell groceries and receive appropriated funds for their operation. But exchanges are self-supporting, sell toys, appliances, clothing and household goods, and are run by three separate military entities-the Army and Air Force jointly, the Navy and the Marines.
Each year, Congress appropriates about $1 billion to run the commissary system, whose 17,400 employees sold $5.2 billion in goods in 1996. The appropriation covers three-quarters of the system's operating costs; the surcharge accounts for the remaining 25 percent. Opponents of the commissary system argue that the $1 billion could be better spent elsewhere. Why not either turn commissary operation over to a private company or close the commissaries and send people downtown to buy their groceries? With the expanding presence of discount warehouse supermarkets like Price Club and Sam's Club, military families don't need low-priced commissaries. Why should the taxpayer cover the costs of generals' and admirals' milk and cookies?
Commissary defenders argue that the commissary privilege is an important part of the military compensation package, especially for people in the lower-paid enlisted ranks. Altogether, commissary shoppers save $1.6 billion a year on their grocery bills. DeCA and military lobbyists argue that eliminating the commissaries would necessitate compensating active military personnel and retirees for the lost savings. This would cost taxpayers an extra $600 million a year, they say.
Proponents of commissaries argue that they do not offer substantial competition to private supermarkets: commissaries account for only 1.7 percent of grocery sales in the United States and are prohibited by law from advertising their prices.
A private company would likely have difficulty assuming operation of the only worldwide grocery chain in existence. DeCA's 312 stores are spread across the globe from Turkey to Korea to Alaska to the Azores. Some are on remote bases far from normal commercial supply chains.
Calls for privatization have echoed down the aisles of the commissaries for at least 40 years. The latest call came in October, when the Defense Science Board recommended turning commissary operations over to a private company, while maintaining a subsidy to the company to keep prices below market level. But the panel's recommendation came the same month as the official designation of DeCA as the first transitional performance-based organization by the vice president.
DeCA Director Beale is hopeful that privatization will not be considered a serious option now that the PBO initiative is being pursued, and now that both the vice president and the president have publicly discussed their support for the PBO concept.
"For the better part of four years, my principal function was as guardian of the commissary benefit and its chief spokesman," Beale says. "We've gotten beyond the point of justifying our existence."
Maybe so, but even as DeCA's PBO pilot takes off this year, privatization will stand by in case the initiative fails to stay in the air.
Efficiencies already achieved by DeCA made it a top candidate for PBO status.
The military's four commissary systems were consolidated into the Defense Commissary Agency in 1991. DeCA got off to a rocky start, discovering early that it had to deal with more than $400 million in unpaid bills-buckets of old invoices-and hundreds of angry suppliers.
DeCA's management team decided they needed "to reduce operating costs dramatically if we were going to preserve the benefit," for military personnel, Beale recalls. First, the agency got on top of its late-pay problem by implementing an electronic commerce initiative called "delivery ticket invoicing." Private grocery chains have since benchmarked and copied it. Commissaries began modernizing checkout systems to provide faster service to customers. DeCA reduced its roll of military employees from 1,900 to 19, because personnel costs were on average 33 percent less for equivalent civilian employees. This and other cost-cutting measures reduced requirements for appropriations by $267 million from fiscal 1994 to fiscal 1997, DeCA says.
As a result of base closings, DeCA closed commissaries, cutting the number from 384 in 1993 to 312 today. Employment dropped 15 percent from 20,473 to 17,416. Stores remaining in business saw their sales surge from an average of $15.2 million in 1993 to $16.8 million in1996.
The PBO Initiative
By early last year, DeCA officials say they reached a reform standstill. Without changes to the rules governing how the agency operates, further cost-cutting measures would be increasingly difficult. That's why the PBO concept was so attractive to Beale. It provided a framework in which his agency could cut costs while maintaining a high level of service to commissary patrons. DeCA would demonstrate how relaxing federal regulations and making agency heads more accountable for savings and results can create a more efficient and customer-friendly government.
"We've already saved as much money as we possibly can since the commissaries were consolidated," says John McGowan, director of operations. "In order to preserve the benefit we need to move to the next level and become a PBO."
The most visible change for a PBO is the transformation of the agency director position to something that resembles a private-sector CEO.
Maj. Gen. Beale, who retired from the Army at the end of September after serving as DeCA's director for four years, returned to the agency in October as the first civilian director of the commissaries. DeCA created a three-year Senior Executive Service position-director for transition-to guide the agency through the transition. Beale will serve in that position for three years. At the end of three years, if DeCA has made the complete transition into a PBO, a permanent position will likely be created.
The permanent position would be modeled after private-sector CEO jobs, says Wynn Hasty, director of personnel and training. That could mean significant cash bonuses some day for the top management of a PBO-style DeCA. But first DeCA has to get the waivers approved that will allow it to become a PBO.
DeCA is seeking waivers to federal rules in four areas: financial, procurement, personnel management, and in the services DeCA buys from other Defense agencies. Some of the waivers require congressional approval, though some require only the DoD green light. Each area in which waivers are being sought has its own set of challenges for DeCA's management.
But each is important to the goal of cutting operating costs. According to Beale, many laws and regulations add no value to the services agencies provide, and often add to the costs they must shoulder.
Waivers would relieve DeCA of many such costs, and in the PBO model, the agency could use some of the savings for investments that would improve service. The PBO idea addresses a frustration common to managers throughout government-their inability to shift money they save in one account for use in another account. DeCA wants to create a single budget fund for the agency. Currently, DeCA must maintain three separate accounts for managing its operations, stock and surcharge funds. Not only is it inefficient and expensive to keep track of three different accounts, but DeCA currently is prohibited by law from moving money between them, says Gary Lutz, director of resource management.
"We've reduced resale inventory investment over $100 million since DeCA was established, but we cannot use these savings anywhere else," says Lutz. "The backlog of facility maintenance and repair, such as leaking roofs or deteriorated floors, could have been eliminated if DeCA had been authorized to use these one-time savings. In the private sector, you could move this cash to where it is needed and provide the best return on investment to the business." Agency officials will be developing a plan to invest surcharge funds during the latter part of fiscal 1997, Lutz says, in coordination with the DoD comptroller and the U.S. treasury.
Governmentwide efforts to streamline acquisition processes are already helping DeCA reduce procurement costs, but the agency is seeking additional freedoms. DeCA is the only federal agency that buys equipment for grocery stores. Waivers to expand acquisition flexibility would enable the agency to efficiently handle transactions that are unique to managing a worldwide grocery chain, says Crosby H. Johnson, director of acquisition management.
"We are uniquely qualified to be a test agency for a change in [procurement] rules," says Johnson. "There are a lot of hoops you have to jump through in contracting to buy commodities. That makes sense for some DoD agencies. But we don't buy tanks and guns. We buy and sell groceries."
Both the single fund plan and the acquisition reforms are part of the legislative package DeCA will take to Capitol Hill this year.
DeCA is also seeking waivers from Defense Department programs requiring the agency to buy certain products through other DoD agencies. Refrigeration equipment, for example, must be procured through the Defense Logistics Agency. After procuring the equipment for DeCA, the Defense Logistics Agency tacks on a surcharge. In addition to making the process more expensive, this extra layer of bureaucracy increases the amount of time it takes to get equipment to the commissaries.
DeCA must currently contract out to several other DoD agencies for services that could be provided more efficiently and at a lower price by private contractors, agency officials say.
For example, an in-house study by DeCA showed the agency could save $25 million per year if it used a civilian contractor to transport groceries instead of the Defense Transportation System. Under federal law, DeCA is required to use the Defense Transportation System for the approximately 21,000 tractor trailer-size containers of groceries the agency ships to commissaries overseas every year.
"We're a big part of DTS' business," says Arlene Ripp, manager of DeCA's transportation business unit. "The problem is, DeCA is a peacetime shipper but is asked to support war readiness. All DeCA customers have to pay higher rates to compensate for increased transportation expenses."
DeCA is required to use wide area network services from the Defense Information Systems Agency (DISA). Service has been expensive and DeCA has been low on the customer priority list, resulting in frequent disruptions of service during data transmissions. A commercial carrier might have been able to provide the same or better service at a lower cost.
Since DeCA raised its concerns to the information systems agency, however, the situation is improving, says Rosita Parkes, DeCA's director of information resource management.
"DeCA represents 11 percent of DISA's fiscal 1997 revenue base for use of the non-secure network and is its largest customer in terms of number of sites," Parkes says. "They've given us great cooperation and we now expect to have a 20 percent reduction in our bill next year." DISA awarded new service contracts and upgraded its infrastructure, and then passed the savings on to the commissary agency. DeCA has also been moved up on the priority list.
DeCA contracts out to the Defense Finance and Accounting Service as well. A waiver giving DeCA the option to seek proposals from private firms for its transportation, information systems, and accounting needs would give DeCA's service providers in other Defense agencies the incentive to streamline their operations and lower their costs. If the agencies could make better offers than their private sector competitors, DeCA would stick with them. For the Defense Department to grant the waiver, allowing DeCA to open its intradepartmental contracts to outside vendors, it will have to weigh the interests of DeCA against the interests of the other agencies involved.
The largest number of stakeholders will be affected by DeCA's plans to alter its human resources management. Changes in hiring, compensation and personnel management will involve agency management, unions, department officials and Congress, not to mention DeCA's 17,400 employees.
The immediate concern for employees any time an agency begins to talk about change, says Beale, is the question "How will it affect me? Will I still have a job?"
To address its problem of filling 60 percent of its cashier positions each year (to cope with the high turnover rate in the job), DeCA would like to create an apprentice-type position with a limited benefits package for new hires. An apprentice would be promoted to a full benefits position after a certain amount of time, say three years. Other personnel changes proposed include a simplified classification and pay system and a simplified performance evaluation process.
DeCA has formed a human resource management work group, composed of managers, personnel specialists and union representatives to discuss the proposals.
American Federation of Government Employees (AFGE) representative Dave Rodriguez says the union supports the idea of results-based management and performance-based organizations, but it has concerns about the impact on employees. AFGE is wary of performance-based pay. Rodriguez says the union would support "true compensation and benefits rather than ornamental incentives," like honorary awards or small cash bonuses.
AFGE President John Sturdivant says when agencies start talking about personnel changes with OMB, one of the first hurdles they have to go over is to make sure the unions are involved.
"We don't fear PBOs as long as the union plays a role," Sturdivant says. "And we've been assured we will. We intend to play a productive role in making them successful."
Both union representatives and DeCA officials say they recognize there will be trade-offs and that a long-term partnership will be required to work out the details of employees' status in a PBO.
Looking to the Future
The Defense Department has been supportive of DeCA's transition so far. Director of operations McGowan says all the flexibilities the agency has requested have been approved, though they've been minor in comparison to the waivers the agency now desires. At the same time, DoD has been cutting the agency's budget-by $68 million this year.
Beale welcomes the change in his leadership role as director of transition into a PBO, though he won't predict whether he will seek the position of CEO once the transition is complete.
"I'm just going to get the job done that the department is paying me to do," Beale says. Now Beale will spend much time working with DoD officials and Congress to push through changes that would make his agency the first fully established performance-based organization in the federal government.
DeCA has many trails to blaze. It needs to obtain DoD waivers and seek Congressional approval to make the changes necessary to achieve greater control over its budget, gain more flexibility in contracting and procurement, and adopt private-sector personnel management practices. The agency will have to confront employees' concerns about losing benefits and job security in a PBO. And, of course, DeCA will have to produce results that justify less Defense Department and congressional oversight.
DoD Comptroller John Hamre is confident DeCA will rise to the occasion. "It's been a lot of fun representing the vice president in handing out awards to DeCA for the path-breaking achievements they've had-and they've done it with a lot of shackles," says Hamre. "Hopefully, with standing up as a PBO, we're going to start taking off some of the shackles and let some of the power inside this organization flourish."
By Brian Friel
February 1, 1997