No Running Room

Squeezed by shrinking revenues and a growing number of competitors, the General Services Administration is trimming its sails to fit a new market.

The General Services Administration is in a fight for its life. Insolvency-not just declining revenue-threatens the viability of the agency's two procurement organizations. At the agency's Federal Technology Service, IT Solutions regional centers could end up $45.7 million in the hole by Sept. 30, according to GSA estimates, as fees from a dwindling customer base no longer cover expenses.

At its peak in fiscal 2004, IT Solutions revenue reached $7.2 billion. GSA projects it will earn only $4.3 billion this fiscal year, an amount that won't cover expenses. Adding to GSA's woes, FTS' Professional Services business line also is broke and business lines within the Federal Supply Service are losing money, too.

Federal agencies dissatisfied with GSA's services are taking their business elsewhere. That's a huge problem for the agency, a self-sustaining contracting shop largely independent of congressional appropriations. A business faced with declining revenue would cut costs, and so must GSA. As a service provider, it spends the most on labor, so 400 jobs will be eliminated-roughly 10 percent of the workforce in acquisition operations. Agency officials have ordered a hold on filling management and administrative positions, and reductions in training, travel and conference attendance-all short-term recovery tactics, GSA officials acknowledge.

Ill winds have buffeted GSA for many months. Efforts to steady the ship have not yet succeeded. The agency is reorganizing as one means of stemming the losses, but observers say a more radical restructuring is likely if it fails to staunch its two-year revenue slide within the next year or so.

In September 2005, then-GSA Administrator Stephen Perry signed an order to create the Federal Acquisition Service, merging the Federal Supply Service and the Federal Technology Service. But the merger won't be finalized until Congress passes legislation joining the revolving funds for FSS and FTS. Administrative operations won't be combined until fall, more than a year after GSA began reorganizing.

GSA has lacked a Senate-confirmed administrator since Perry quit on Oct. 31. In early April, President Bush nominated Virginia businesswoman Lurita Alexis Doan to become the next administrator. If confirmed by the Senate, she will replace David L. Bibb, a career civil servant serving as acting administrator. Doan faces a steep learning curve and the prospect of only 30 months in office. She'll have to rely on GSA's cadre of senior civil servants and eschew the overconfidence typical of new political appointees, says Frank Pugliese, a former FSS commissioner and now managing director of DuPont Government Business Development. "She must immediately understand there are good folks there," he says. With the right attitude, a new administrator could reverse the agency's downward plunge. "They're at the bottom right now," he adds.

A Diminished Future

FTS revenue won't soon climb back to its old heights, GSA acknowledges. If cost-cutting measures work as planned, agency operations now in the red could break even in fiscal 2007, Bibb says. He doesn't want to offer an estimate, but a former GSA official speaking on condition of anonymity says IT Solutions revenue probably will stabilize somewhere between $2 billion and $3 billion.

The agency is investigating whether it can cover its FTS losses by tapping into reserve funds, including money set aside for agencies' transition to Networx, the upcoming governmentwide telecommunications contract. GSA has about $150 million stashed in the Networx reserve, money generated from customer fees. Other reserve funds are not nearly as well stocked. "When you have revenue shortfalls, you have to look at all possibilities," says Bibb.

Losses on the FSS side of the house stem from clinging to an old-fashioned business model, says Neal Fox, a former FSS assistant commissioner who is now a consultant. Money troubles are worst at the Global Supply service, he adds. "They put copier paper into warehouses-cleaning fluid, all sorts of everyday items that can be shipped from vendors," Fox says. A GSA estimate says the service will lose $9 million this fiscal year. Bibb says the agency has taken steps that could allow it break even. Other FSS business lines such as furniture sales also are money-losing propositions, although GSA attributes losses there to tight federal budgets. "Furniture is very discretionary," says chief agency spokeswoman M.J. Pizzella.

GSA is reviewing Global Supply's structure, but has made no decision about what to do with its warehouse supplies. "It's a dying business," acknowledges a GSA official who requested anonymity. At the same time, storing strategic stockpiles of material is part of the agency's mission. "When they need cleaning fluid in Iraq or Afghanistan, the military turns to GSA," the official says.

Meanwhile, GSA is working on staff reductions, hoping that early retirement or buyout offers will prevent the need for layoffs. G. Martin Wagner, acting commissioner of the Federal Acquisition Service, has not ruled out a reduction in force, however. The new Federal Acquisition Service will maintain 4,130 federal positions, according to GSA. In the future, it might rely on contractors to handle work surges rather than do more hiring, according to current and former GSA officials. "It's certainly easier to bring a contractor on board with a short-term spike," Bibb says, adding that GSA hasn't finalized staffing plans and that the current workforce could be made more efficient. "I'm not going to rule out any options at this point," he adds.

Jack Hanley, president of the Council of GSA Locals of the National Federation of Federal Employees, says the personnel cuts will haunt the agency. "How do we get our business to work when we get rid of the people who do the work?" he says. "It's a plan for extinction."

Years of Turmoil

GSA's turmoil began in 2003 with revelations of contracting abuse. The agency's procurement arms, particularly FTS regional operations, enjoyed a reputation for quick turnaround with few questions asked. The trouble was the Army and other agencies used the technology contracts to pay for construction of buildings and other purposes that weren't allowable.

In response to the scandal, Perry announced the Get It Right program. This stick-to-the rule book approach is an oft-cited factor in the agency's loss of business. GSA watchers joke that customers get a free audit with every acquisition. No one denies the agency needed a dose of extra oversight, but "You don't make 'We're cleaning it up' the central message," says Larry Allen, executive vice president of the Washington-based Coalition for Government Procurement, a contractor trade association. You clean it up and move along, he says.

But since launching Get It Right in July 2004, GSA has kept up a drumbeat of regulatory compliance. Triple-checking everything and hewing to a conservative interpretation of the rules require extra time-and for GSA, time is money. If its turnaround is little faster than in-house contracting shops, then why should agencies bother paying GSA to buy for them?

The agency also angered customers in fiscal 2005 by suddenly reversing its long-standing practice of using the FTS fund as an off-the-books savings account that allowed agencies to deposit money from one fiscal year and spend it in another. The Defense Department, GSA's largest customer, made particular use of the now-closed appropriations law loophole by parking between $1 billion and $2 billion in the fund. Some of the money was appropriated as long ago as five years, according to Defense and GSA sources. Returning that money to the agencies "upset a lot of people, because now the money could no longer be used; it was old money," says Sandra N. Bates, a former FTS commissioner, now an executive consultant for Vienna, Va.,-based Topside Consulting.

To date, GSA has returned $800 million to the Pentagon, although "There will be more," Bibb says. GSA's brusque handling of the matter hardly improved things, says Allen. "All they did was cut a check and say, 'Here's your money,' " he says. "You have a number of senior-level people in the military who said, 'There's no way I'm giving GSA another dime.' "

Tweaking the Mission

Turning around GSA will depend partly on changing its business model. The agency wants to position itself less as a middleman for individual purchases and more as an agency partner to improve enterprisewide management, current and former officials say. "There's no reason our schedules and our [governmentwide contracts] can't be tweaked to be used as the strategic sourcing solution," Bibb says. The agency can help government transform itself into a leaner, more rational and standardized operation. Economies of scale are found in standardizing processes, not just in products, Wagner told Government Executive earlier this year.

Offering business process reengineering to agencies is the right path for GSA, according to the procurement coalition's Allen. "It makes sense to move in a direction that their customers are likely to," he says. But, he adds, GSA risks diverting its attention from its real money-maker: the multiple award schedules, which still are handled by the Federal Supply Service.

Under the reorganized structure, "there isn't one bellybutton to push, one place to go with concerns" about the schedules, Allen says. At the new Federal Acquisition Service, IT schedules will become a responsibility of the Integrated Technology Services organization, while a new General Supplies and Services outfit assumes control of all others. But splitting the schedules has been tried before and "it was a disaster," according to Allen. GSA's former Information Resource Management Service ignored the IT schedules, he says: "They knew nobody was watching, so they went off the reservation and started doing strange things." Allen fears that administration of the IT schedules could be similarly ignored if Integrated Technology Services focuses too much on selling agencies full-service offerings. "They've got to get off that, because that's not the way the bulk of the purchases are done today," he says.

John Johnson, an assistant commissioner at FTS, says the schedules won't suffer from neglect. "It's not as if we're not paying any attention to those. We are," he says. GSA is conducting a review of IT services available on Schedule 70, he adds.

Unfinished Journey

As long as GSA's reorganization remains incomplete, it will be unable to truly move forward. House-approved legislation sponsored by Rep. Tom Davis, R-Va., that merges FSS and FTS funds has stalled in the Senate Homeland Security and Governmental Affairs Committee. Davis' bill also centralizes headquarters control over the GSA regions to a greater degree than the new structure the agency is slowly implementing. The Senate committee likely will remove Davis' provisions dictating the shape of the agency, says a Senate staffer. Complicating matters, Congress in November enacted language initiated by the Senate Appropriations Committee requiring GSA to obtain permission from the House and Senate appropriations committees before proceeding with its administrative reorganization. Both committees signed off on GSA's plans in April. Approving the Davis language would require GSA to "start from square one, because that makes the conversation they've had with Appropriations useless." The Senate committee will focus only on merging the two funds, the staffer adds.

House Government Reform Committee staffers say Davis' organizational language was never meant to be mandatory. "We still feel strongly about our legislation," says the committee's legislative director, Ellen B. Brown. "But if that's not what the preferred way is by the Senate or GSA, it doesn't matter. The merging of the funds has to happen legislatively; let's get that done at least."

A former GSA official says failure to establish stronger centralized control is one reason behind the recent exodus of senior executives. For example, Deidre Lee, former assistant commissioner of GSA's Integrated Technology Service, recently accepted a job at the Federal Emergency Management Agency. Despite the reorganization, headquarters executives like Lee remain relatively powerless in the regions, where political appointees rule, some GSA observers say. Lee technically oversaw the regional IT procurement organizations, "but the regional operations [didn't] report to her," a former official says. "You have accountability but not authority." Lee declined to comment.

As GSA struggles, its customers face an expanding array of options. The Defense Department now formally discourages, although does not prohibit, acquisition through outside contracting shops. "We had gotten to the point where it was almost a default position within DoD to just send it to another agency," says Domenic Cippichio, deputy director for policy, defense procurement and acquisition policy. The Defense Logistics Agency has proposed setting up its own procurement schedule system, although industry sources say intergovernmental opposition likely will inhibit the proposal. Congressional sources say any move by DLA to duplicate GSA's schedules would be unlikely to get past Rep. Davis.

Nonetheless, new multiple-agency contract vehicles created by other agencies such as the Homeland Security Department-as well as existing ones-present a challenge to GSA. "There are too many acquisition vehicles; it's an issue OMB is aware of," Bibb says. GSA is nonetheless poised to pull through, he says, adding that turnaround on purchases is getting faster. And having gone through the fire of intense examination, GSA is in a position to sell by-the-book government procurement. "If you'll do business with us," Bibb says, "you can be sure we'll get the contracting right, that there will not be an embarrassing situation for you-a follow-up audit where you look bad and we look bad, too."

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