By Matthew Weinstock
June 1, 2002Fee-for-service ventures offer the rest of government a solid foundation for operating like a business.
o to a congressional hearing, tune in talk radio, or attend a luncheon in Washington and you are bound to hear the question: "Why can't government act more like business?" The underlying premise is that government is too slow, too bureaucratic and too rigid. Businesses, on the other hand, are viewed as fluid, quick to act and willing to take risks. Where government bureaucrats see obstacles, entrepreneurs see opportunity.
But, surprisingly, the federal government is home to some entrepreneurial thinkers-and doers. Fee-for-service ventures-such as GovWorks, an acquisition center run by the Interior Department's Minerals Management Service; Federal Systems Integration and Management Center (FEDSIM), an information technology support operation within the General Services Administration's Federal Technology Service; the Central Intelligence Agency's Directorate of Administration; and the Veterans Affairs Enterprise Centers-have been leading the charge for agencies to operate in a more businesslike fashion. Spurred by a movement to cut costs and improve efficiency, or by the threat of extinction, these enterprises began selling their services within their own agencies and to other federal departments. They still are in the minority, but their ranks are growing and their experiences can provide lessons for the government as a whole.
Pundits and politicians have been saying for years that government should mirror some of the private sector's best practices. Way back in 1932, Congress passed the Economy Act, which allows some federal agencies to work on a cost reimbursable, or fee-for-service basis. These working capital funds have cropped up in various forms at a number of agencies over the years. In the 1990s, the Clinton administration's National Partnership for Reinventing Government accelerated the drive to make government more businesslike. It was time to break the monopolistic stranglehold some agencies possessed on support functions, such as procurement. It was time for competition to drive down costs and make agencies more efficient.
In a 1993 report, the reinvention team said: "Most federal managers must use monopolies to handle their printing, real estate, and support services. . . . A monopoly's managers don't even know when they are providing poor service or failing to take advantage of new, cost-cutting technologies, because they don't get signals from their customers. In contrast, competitive firms get instant feedback when customers go elsewhere."
The report continued, "We will make agencies compete for their customers' business. Wherever feasible, we will dismantle government's monopolies, including those that buy goods and services, acquire and maintain office space, and print public documents."
The philosophy has carried over into the Bush administration. The president's management agenda calls for a government that is more results-oriented and market-based, "actively promoting rather than stifling innovation through competition." Taking a slightly different approach though, the Bush administration wants more competition between federal employees and private contractors. The management agenda also stresses the importance of agencies becoming more focused on both their internal and external customers.
Yet all too often, government entrepreneurs run up against a chorus of naysayers, who argue, "Government can't do that," or "We don't know how to do it." To them, entrepreneurial government is an oxymoron. In addition, entrepreneurs find themselves at odds with a power structure that does not like losing control.
"It's always been a situation where, within the bureaucracy, some of the budget and procurement people are not that thrilled with the idea of changing the dynamics," says Michael Serlin, a retired Treasury Department official who pushed the entrepreneurial concept in the mid-1990s. "There is a certain amount of tension that exists." Part of that, he says, stems from the fact that opponents see entrepreneurial endeavors as a boon to those involved rather than a benefit for the entire agency or department.
Despite the apprehension, innovative thinkers have been quietly constructing businesslike enterprises, proving that government can take risks. They've knocked down barriers-some real, some imaginary-to building an entrepreneurial government. In doing so, they've lowered costs and become more efficient. At the same time, they're changing the way program offices purchase goods and services.
"The key point is this: what [entrepreneurial government] does is it reduces the cost of government's overhead," says Serlin. "It allows agencies to spend more of their time and money on program activities." During the Clinton administration, Serlin headed the National Performance Review team that developed some of the most successful forms of entrepreneurial government-franchise funds. First authorized by the 1994 Government Management Reform Act, franchise funds are designed to encourage competition for administrative functions, improve customer service and reduce costs. The legislation created pilot franchises in six agencies: the Environmental Protection Agency, and the departments of Commerce, Health and Human Services, Interior, Treasury and Veterans Affairs. Operating on a fee-for-service basis with no subsidies from appropriations, the funds are expected to fully cover their costs. Collectively, they have grown into a half billion-dollar industry. Despite their success, the franchises still operate on a pilot basis. The Office of Management and Budget has drafted legislation giving the funds permanent status and extending the concept governmentwide, but is unclear when, or if, a bill will be introduced. Late last year, Congress approved legislation reauthorizing the franchise funds for another year.
Beyond franchise funds, innovation has taken root at the Central Intelligence Agency and the Trans- portation Department, both of which won congressional approval to set up entrepreneurial enterprises. The CIA's Directorate of Administration, for example, which provides a variety of administrative services, was granted authority to sell its wares to mission offices, charging fees for automotive repairs, software development and telephone operations, among other things. Still other forms of innovation have taken hold at the Veterans Health Administration, which transformed its regions into networks that mirror private health care companies. This allows the regions to react more quickly to an ever-changing market, in most cases resulting in improved beneficiary satisfaction and health care. The Forest Service too is leading the way. Its Pacific Southwest Region allows individual employees to become businesspeople and sell their services-everything from trail planning to billing-to the region's 18 forests and beyond. And the Defense Department last October created its Business Initiatives Council, designed to bring a more businesslike approach to hiring practices, financial management and acquisition.
Each of these enterprises offers a lesson in how to build a vibrant business in a bureaucratic world.
CHEVY VERSUS CADILLACAt its core, entrepreneurial government is about changing incentives, says Jean Sheppard, head of the CIA's Directorate of Administration. For administrative functions, it's a matter of focusing more on customer needs and satisfaction while providing top-level service at an affordable price. For program managers, it's about understanding how much administrative services cost and realizing that the lower the cost, the more money they have left to spend on program operations.
In a world where funds are appropriated, costs are relatively unknown since budgets for program offices rarely include line items for support services such as printing, telephone operations, vehicle repairs and facility maintenance. This was the case at the CIA, and it created some hardships for the directorate, particularly in the mid-1990s when the agency was suffering from staff and budget shortages. As a result, the directorate was having trouble providing quality services to its customers-the mission offices. The organization had two options-ask a deficit-weary Congress for more money or try something new. Under the leadership of then-director Richard Calder, the directorate opted for the latter, becoming an agent of change. In 1998, it won congressional approval to become a working capital fund. Rather than getting direct appropriations from Congress, it now charges mission offices for services.
Doing so forces the offices to think twice before making an acquisition request. It requires them to truly assess their needs. "The analogy we use is this: I say to an employee, 'Go buy a vehicle.' Generally the first question that somebody would ask in the private life is, 'How much do I have to spend?' But if I say to them, 'Don't worry about it, I'm paying,' chances are they are going to pick a high-end product, the Cadillac service, as opposed to the basic transportation model," says Paul Graver, deputy director of finance at the CIA.
The challenge for the directorate was figuring out how to price things. With the help of PricewaterhouseCoopers, officials benchmarked their fees against those of private companies. In terms of facilities management, the directorate studied how companies such as media-giant Gannett calculate rent. The analysis considered a variety of factors including square footage, location and amenities such as an on-site facility manager. Further copying the private sector,the directorateinstituted activity-based costing, an accounting method that breaks down the total cost of operations and shows exactly how organizations are spending their money.
Getting mission offices to buy into the system was not an easy task, says Sheppard. They were not used to being charged for administrative functions. A key to earning their support, she says, was using data from the benchmark studies. Providing real-world prices showed that the directorate was not just pulling numbers out of a hat. The directorate also created advisory boards that included other parts of the agency and began briefing them on the coming changes. The panels served as a good sounding board for initiatives and provided the directorate with a way to clearly communicate to mission managers the importance of profit and loss, says Sheppard. And since resource managers from mission offices sat on the boards, they provided an appropriate forum to get buy-in for the new approach.
BE AGGRESSIVEEncouraging a savvy, go-getter mind-set is another important aspect of entrepreneurial government. It's a matter of transforming career civil servants into salespeople and risk takers. Business consultant Gifford Pinchot says most people have an entrepreneurial spirit buried inside them. "It has been suppressed . . . but it's like the genie in the bottle, once you let it out, you can't get it back in." Katherine Valltos agrees. She's been let out of the bottle and is unwilling to go back. A contracting officer with GovWorks, Valltos relishes life as an entrepreneur. Valltos, who drums up business for the enterprise, still recalls the thrill of the first "big bite." It was 1996 and she had been working the phones for months when she heard about a plan at the Veterans Affairs Department to upgrade the computer networks at its hospitals. The General Services Administration's Federal Technology Service was tapped to oversee the project. "I had heard through the grapevine that [FTS officials] were concerned about how to handle the acquisition side of it, and there was pressure to get it going very quickly," Valltos recalls. So she made a cold call to FTS, but got an answering machine. She left a long message explaining how GovWorks could help. Her organization had experience handling large acquisition projects in short order. During the early 1990s, the staff oversaw a multimillion-dollar project to modernize information technology systems at the Interior Department's Mineral Management Service. They also handled a large software procurement to install Novel and Microsoft products on computers across the department.
"About five days later I got a return call. I was spinning my wheels trying to remember what it was for since I had placed so many before and after that," she says. Following a brief phone conversation, Valltos and two of her GovWorks colleagues jumped in a car and raced to FTS' offices to make the official pitch. "By the time we got back to our office a few hours later, the contract was on our fax machine ready for us to sign," she says. Five years later, GovWorks is one of the government's most successful business enterprises. GovWorks has to adhere to the same rules as other government procurement shops, but what makes it and other franchise funds so efficient is their customer-first focus, says GovWorks' chief David Sutfin. They've removed layers of bureaucracy that tend to plague in-house procurement offices. For starters, GovWork's contracting officers generally have more latitude than their counterparts in procurement offices to make decisions without having to check in with senior management, says Sutfin. Other processes were streamlined as well. For instance, before bidders make oral presentations in response to requests for proposals, GovWorks gathers a significant amount of information about key personnel the contractor plans to assign to a project, as well as a record of past performance.
"By getting that information sooner, we are much better prepared for the oral presentation and that helps accelerate the entire process," Sutfin says. "The culture is to be customer focused. You have to be responsive. We don't violate any regulations, but we know how to get procurements done fast."
font style="font: larger Arial, Helvetica, sans-serif;">PROPER TRAININGImplementing a culture change depends on the circumstance facing employees as their agencies make the shift to entrepreneurial government. At the Forest Service, for instance, staff cuts and flat budgets during the 1990s created significant skills and human resources gaps. Yet instead of turning to contractors, the Forest Service turned inward and unleashed the power of its entrepreneurs, recalls Pinchot, who helped transform that agency. In the Pacific Southwest Region, Forest Service employees were encouraged to create what amounted to individual businesses, selling their talents to other parts of the agency. Pinchot says it took weeks of intensive training for some of the employees to grasp the new ideas. His firm conducted a 45-day boot camp for the Forest Service to teach everything from spreadsheets and business planning to problem solving. It sounds like basic training, but Pinchot says understanding the principles of business planning forces government workers to look at the world through an entrepreneur's eyes.
For others, survival is the driver. Procurement employees at the Minerals Management Service, for example, had two choices-lose their jobs or become entrepreneurs.
"We had been told that at least half of the staff would be gone," says Sutfin. It was 1994 and the Clinton administration was downsizing. Procurement offices were high on the target list. "I took the staff off site and said, 'I have enough years of service that I will survive this. But some of you won't.'
We started to think about a new model-offering our services to other agencies for a fee," he says.
It didn't take long for staff to agree to the concept. The learning curve, however, was steep. No one had a background in business planning or marketing. Sutfin compares it to starting a small business from scratch. It requires a willingness to fail and to learn from those mistakes. That is a common theme among entrepreneurs, and something the VA Enterprise Centers learned early in their existence. The VA has a collection of franchise funds, all coordinated out of a single office. One of its early efforts was the Computer Training Center. Created in 1996, the center offered training on a range of software applications including Microsoft Word and Excel. By 1998, it was unable to earn enough revenue to cover its expenses and was shut down.
The center failed to fully assess the market or to understand the level of competition it faced, says Steve Swanson, director of enterprise funds at the VA.
"A lot of our business lines started off in a similar fashion," he says. "What we learned from [the Computer Training Center] though was the need to take business planning very seriously. We had to look at our products, look at the competition and figure out what to charge and why. We had to look at the market and see what the customers wanted. It's amazing to me that out of six business units, only one failed."
Swanson says it is also important to learn tricks of the trade from private sector partners. As consultants come in to pitch their services, Swanson and his staff pepper them with questions about how to track and record leads or how to manage a sales staff. They also learned the importance of creating a corporate logo and image for their services.
LOOKING FOR RELIEFReprogramming the workforce is part of the entrepreneurial equation, but many enterprises must go outside the organization to acquire critical skills. Managers feel hemmed in by arcane personnel rules that prevent them from hiring the people they need. Most federal managers complain about being stifled by a lengthy hiring processes and an inability to compete with private sector pay. Those problems are magnified in entrepreneurial agencies.
"I'm looking for a little relief on the personnel side," says Timothy McCurdy, director of FEDSIM, a GSA division that's been offering its information technology acquisition strategies to agencies since 1972. "There's been a lot of talk about pay-banding, incentives and other things. But until we get those, it really limits our ability to grow." Mainly, he says, it is hard to recruit top-notch personnel from the private sector. Beyond pay disparity, they worry about the length of time it takes the government to make hiring decisions. McCurdy says he is leery of offering bonuses to encourage his staffers to stay with the enterprise, for instance, because of the tensions they can create. "If I give bonuses to three superstars, what to do the other people think? How will they react?" he says. "We could end up having to pay bonuses to everyone. It's not worth the risk, so instead we just don't give retention bonuses."
Hiring entrepreneurial thinkers, McCurdy adds, is difficult when it takes at least eight weeks to make a job offer. The head of another franchise fund, speaking on the condition of anonymity, says practices such as veterans preference create problems. The enterprise wasted nearly 90 days searching for an employee recently, he says, because a veteran's resume kept floating to the top of the stack. The veteran lacked some of the critical thinking skills the fund manager was looking for, yet he had to interview the applicant because of personnel rules. The delay meant that he had to post the job again, losing valuable time in hiring a more qualified applicant. Defense's Business Initiatives Council has gotten around some personnel rules largely as the result of the war on terrorism. To avoid creating a revolving-door problem, the department normally is required to wait 180 days before hiring recently retired military personnel. "In the private sector, you would get your hands on that person as soon as possible if they were the right person for the job," says the Army's Craig College, who took over the council in April. Defense policy allows that rule to be suspended whenever the president declares a state of emergency, as he did after Sept. 11. The council plans to study hiring trends since September to see whether any Defense agencies have abused the waiver. If not, the council will ask Defense personnel officials to scrap the 180-day rule permanently.
FINDING CHAMPIONSCritical to the success of any entrepreneurial endeavor is support from top leaders and accountability. The CIA's Graver says the directorate would not have succeeded had agency brass not given their blessing early on. Every time leadership changed at the agency, that support became even more important. Each time the administration changed, some in the directorate feared the new leaders would pull the plug on the working capital fund. That has not happened. Operations were consolidated under the chief financial officer, but the directorate made a strong case for staying in operation and has plans to expand into new services.
"It's important to have consistency [in leadership] over time," says Ronald Orr, principal deputy assistant secretary for installations, environment and logistics at the Air Force. He ran Defense's Business Initiatives Council until April. "We tend to think these changes will occur overnight. They take years . . . We have to figure out how to keep moving forward even as we revisit our missions." Operating without that support can lead to failure. The Treasury Department was forced to close down a franchise fund that offered training for inspectors general. The group, which operated under the auspices of Treasury's inspector general's office but owed its creation to the Treasury Franchise Fund, was successful for its first two years-1998 and 1999. But in 2000, top leaders at the inspector general's office changed. There was little support for the franchise operation and a great deal of micromanaging, according to department staff. That lead to a high rate of turnover within the business unit, especially among its top officials.
Without continuity and support at the top, the business unit lacked sufficient revenues in 2000 and 2001 to cover costs, a key requirement for any franchise fund to be successful. As a result, it was shut down.
"If you don't have strong leadership, the whole thing is going to collapse," says Barry Hudson, managing director of Treasury's Franchise Fund. "Leadership means many things to many people. At that unit it meant giving them the tools to operate and help them grow. That wasn't happening. They couldn't start new programs to generate new revenue and satisfy their customers."
Serlin says all federal agencies should be looking for ways to apply entrepreneurial ideas to their operations. If implemented successfully, they ultimately allow agencies to reduce overhead and spend more time on mission-related activities.
"There is misnomer at work. People in government think that being more businesslike means make a profit," adds Kay McGuire, an expert on change management at the Army Corps of Engineers. "I think that it means top leaders and citizens are asking us to adopt more businesslike practices. Instead having a piece of paper handled seven times, maybe it only needs to be handled three times. Everyone, even those in the appropriated world, can start adopting some of these practices."
By Matthew Weinstock
June 1, 2002