Government Executive - Authors - Michael D. Serlin

The Company Goes Commercial

Timothy B. Clark and Michael D. Serlin — Thu, 01 Jul 1999 00:00:00 -0400

tclark@govexec.com
serlin@tmn.com

wo years ago, the Central Intelligence Agency used 26 shipments a year to transport materiel needed by its operatives stationed abroad. Today, the number is down to 13, although the volume of cargo has not diminished appreciably. And the agency has found room to include goods for other agencies in the shipments. At the same time, CIA managers are encouraged to use other, more economical shipping methods-including private delivery services-if they can do so without compromising national security.

The agency's Central Warehouse is now a hotbed of entrepreneurial activity, as managers there look for opportunities to sell their special capabilities to internal and external customers. "We offer secure destruction for sensitive equipment ... rendering it unusable and unrecognizable," says a marketing brochure for one warehouse service. Another group at the warehouse is capitalizing on its financial management expertise, selling services to CIA offices that aren't big enough to justify full-time financial staffs.

CIA drivers are now hauling sensitive materials for another government agency, at considerable savings to the government. The drivers have security clearances and trucks with state-of-the-art Global Positioning System tracking systems, enabling them to operate without the guards and chase cars the other agency had to deploy. Fees collected from the other agency support the costs of the CIA transport operation, and reduce unit costs for the agency's internal customers.

And in the wake of last summer's bombings of U.S. embassies in Kenya and Tanzania, the agency's Transportation Service Center is seeing increased demand for its expertise in equipping cars with weapons-resistant armor.

Richard D. Calder, who is pushing the creation of such business activities as head of the agency's Directorate of Administration, emphasizes his tolerance for risk and failure as managers experiment with initiatives far outside the boundaries of tradition in the closed world of intelligence. The armored car entrepreneur, says Calder, found his operation mired in red ink for many months. G. Edward DeSeve, then deputy director for management at the Office of Management and Budget, became aware of the losses the operation was running, but decided the risk not only was justified, but would provide a good example for other government managers to follow.

The CIA is just one of many agencies in which managers are taking advantage of legislation enacted in the mid-1990s to set up businesslike operations (often called "franchises") to sell services to other offices in their own agency and in other departments. New incentives have quickly emerged in these operations. For example, a manager of one of the CIA's franchise operations complained to Calder that his cost of doing business, and thus the prices he could charge, were inflated because his organization had too many supervisors. His request for relief was remarkable in a government where status is usually measured by how many, not how few, people one commands. Calder readily agreed to find work elsewhere in the agency for the surplus supervisors.

Recently, Calder convened a large group of people who work in the Directorate of Administration to listen to a one-hour lecture by one of their colleagues on the mistakes she had made in undertaking one of these new entrepreneurial ventures in the agency. "How many times do you find government employees admitting a single mistake, let alone a list of mistakes?" he asks.

Calder is so excited by his efforts to bring businesslike processes to the CIA that he has taken unprecedented steps to inform others in government, breaking the veil of secrecy that often covers even the most routine CIA initiatives. And indeed, the CIA's experience can be instructive to other agencies inside and outside the realm of national security affairs.

Changing Incentives

Calder is motivated by more than just the bureaucratic challenge of bringing a more businesslike culture to the CIA. Stark budget realities are driving the change as well. The CIA has not been immune to downsizing pressures affecting all national security agencies in the 1990s. Calder's own directorate has lost about a third of its staff in the past few years.

Senior staff in the CIA's other directorates-Operations, Intelligence and Science and Technology-have not always been willing to participate in money-saving programs. Their life-and-death missions demand a timeliness and quality of products and services, and they have found it difficult to tolerate changes that might bring delays in the provision of what they need to get their jobs done. Until recently, they had been accustomed to thinking of support systems-personnel, travel, supplies and the like-as the Directorate of Administration's problem.

Moreover, these consumers of administrative services were accustomed to thinking of them as "free." Their own budgets didn't include line items for these costs. As economics students learn, where goods are free, there is no natural constraint on demand. So what if it cost more to ship goods using government employees and equipment, instead of using private services? It wasn't their money or their problem.

So the impetus for reforms had to come from within the Administration Directorate itself. And it was Calder who got the ball rolling.

Calder was named to head the directorate in 1995. He had spent more than two decades in CIA operations, and brought to his new job a keen understanding of the directorate's customers. He understood their needs and their incentives, which were focused on getting their jobs done with little regard for cost. His challenge was to bring more cost-consciousness and greater efficiency to agency administrative operations.

Calder was not himself deeply schooled in business management, having earned an undergraduate degree from the University of Connecticut in political science and government and a master's from The George Washington University in information systems. But he knew reforms would have the best chance of succeeding if they were based on market incentives of the kind found in private business. So he set about his attempt to change incentives in the 50-year-old agency using business planning and such financial management tools as activity-based costing and a working capital fund to establish entrepreneurial outposts within his directorate. He also hired the consulting firm PricewaterhouseCoopers to give his operation access to experts on the use of business tools in the government context.

Changing incentives at the agency, Calder realized, meant making people more sensitive to costs. There were two sides to that equation:

Suppliers of services would have to learn to count their own costs as the key step to evaluating ways to do business more efficiently.
Consumers of these services would have to be given direct responsibility for spending the sums needed to secure the services they required.

In the first instance, activity-based costing was the key. Few people in government know how much of the taxpayers' dollars they're spending to provide the services or goods for which they're responsible. This information simply hasn't been needed in an environment where operations are financed by annual, centralized agency budgets. And it's information that's difficult to assemble, since policies typically don't exist for allocating overhead (such as the salaries of bosses up the line), accounting for ongoing capital investments (such as trucks or technology systems), or establishing unit costs. But these sorts of questions are possible to address, and were addressed by the PricewaterhouseCoopers consultants as they examined various CIA administrative operations.

On the consumer side of the equation, the answer was to make managers in CIA operations and intelligence pay for the administrative services they wanted. Thus, if a hypothetical Office of Cloak and Dagger ordered up crating and shipping services worth $1 million in 1998, it would get that same amount in 1999. If the office was able to make do with less of the services (or, perhaps, buy cheaper services from non-agency suppliers), it could devote the savings to mission goals-thus shifting money from tail to tooth, in military parlance.

These two key reforms have been mutually reinforcing. Activity-based costing has given suppliers of services the tools to achieve efficiencies demanded by their customers, who in some instances now can go outside the agency to get competitive bids. Some of the suppliers, moreover, have gone into business selling their wares to buyers elsewhere in government-joining the roster of franchises operating on an interagency basis. Congress granted the CIA the authority to set up franchise operations in the 1998 Intelligence Authorization Act (PL 105-107), which also established the agency's Central Services Working Capital Fund. The program was patterned on the franchising provisions of the Government Management Reform Act of 1994, under which civilian agencies have established cross-servicing operations which must be self-sustaining in a competitive environment.

The Company Store

For people in the three line directorates of "The Company," as the CIA is often called, the Directorate of Administration was in effect the company store. It was a store that substituted procedures for prices and thus did little to discourage high demand for its wares. As budgets tightened in the 1990s, however, the directorate had trouble meeting the demand, in part because it was suffering deep staff reductions.

In 1994, the directorate instituted a charge-back system for its services. Predictably, the captive customers resented the change. They didn't like being billed, thought costs were too high and believed services were being reduced. That was the situation when Calder took the helm at the Administration Directorate in late 1995.

Calder responded by forming a Business Transformation Office in October 1996. It established a process for administrative entities to determine the price of their products, benchmark against similar service providers, develop business and marketing plans, and ultimately gain approval to function as business enterprises.

Calder also hired Pricewaterhouse-Coopers in 1996 to help determine costs of products and services and establish business planning processes. The firm had extensive experience in devising cost systems and strategic plans for such federal clients as the Navy, the Internal Revenue Service and the Immigration and Naturalization Service. But Ian Littman, the partner managing the project, says the CIA effort differed from the others in that PwC was asked to analyze the agency's products, services, costs and potential demand in an environment of customer choice. In effect, the firm was helping to design a start-up business plan, and Littman's public sector consultants turned to the commercial practices side of PwC for current techniques used in such planning in the private sector.

By the spring 1997, business planning was advanced enough to alert key House and Senate staffers about the agency's plans for changing to a more businesslike approach. These conversations culminated in enactment the next year of the CIA's working capital fund legislation. Working capital funds permit using income from customers not only to finance current operations but also to accumulate savings for major capital investments. Such funds can carry over from year to year without annual appropriations.

Today, following a rigorous review process that requires detailed comment from customer groups throughout the agency and approval from senior agency leadership, four enterprises are operating as businesses:

The CIA's transportation and storage facility, also known as the Central Warehouse.
The agency's telephone service provider.
The Transportation Service Center, which offers motor pool and package delivery services.
A software development enterprise specializing in Web development, Lotus Notes and relational databases.

Four other major lines of business are being readied for franchise operation later this year: space management, printing and photography, travel services, and training and education.

Warehouse Transformation

The Central Warehouse was chosen to pilot-test the new approach because it had developed a business plan and understood its core competencies. In fact, the warehouse had already won a number of quality commendations, including two of Vice President Al Gore's reinvention Hammer Awards.

The Central Warehouse began by querying its customers to determine what services they really needed. Having long been served with "free" goods, the customers responded that they needed most everything they were used to getting. For example, customers deemed their bimonthly materiel shipments an absolute necessity.

The Central Warehouse then became the first CIA service provider ever to attach specific prices to its products and services. It began benchmarking against similar businesses to determine competitive strengths and weaknesses, to develop strategic partnerships and to learn from others' successes. Ultimately, reducing internal costs became the real issue in determining the success of Central Warehouse offerings.

Leaders of the Central Warehouse developed a marketing and sales strategy that concentrated first on the agency's directorates and components, then the broader intelligence community. They determined they could segment their markets, providing separate modes of shipping for sensitive, classified and unclassified material. Warehouse leaders pledged to win back internal agency customers who had increasingly chosen alternative shipping means for unclassified or lightly classified materials. Customers needing overnight delivery, for example, often thought that FedEx or UPS provided more reliable guarantees than agency shipping services-consigning to the latter items of relatively low priority.

The warehouse can use internal agency means to promote its services to CIA customers, but in addition it has launched an aggressive customer outreach program, stressing reliability, security, flexibility, ease of service and time-definite delivery capabilities. Its slogan-"Doing Business Like Business"-suggests that it sees its competition as being in the private sector. And while that is certainly true of some services, others are more government-specific, as with its offering of secure destruction for sensitive equipment.

Throughout the development process, the Central Warehouse participated in periodic reviews with the senior management of the Directorate of Administration and the staff of the Business Transformation Office. Before its rollout, the Central Warehouse gained the approval of the CIA's Resource Board, chaired by the agency's executive director, with participation from the agency comptroller, the four deputy directors (of Administration, Operations, Intelligence and Science and Technology), the general counsel and the head of congressional affairs. After these key internal officials endorsed the new approach, the CIA got OMB's approval and informed the appropriate congressional committees of the changes.

More Money to Mission

During the year the Central Warehouse has operated as a business, it has changed attitudes and business practices in its own workforce and throughout its customer base. As a working capital fund entity, the warehouse gave appropriations it had been receiving from Congress back to its customers. Those appropriations included not only the direct costs of the services the warehouse had been providing, but also funds to account for the costs of overhead in the Administration Directorate and Central Warehouse employee salaries.

Once customers were told they had to spend their own money, their behavior changed significantly. The very same organizations who had said they could operate with no fewer than 26 materiel shipments per year now discovered they needed about half that many. The consolidation of shipments saved customers $6 million in the first year that they could use for other purposes.

The Central Warehouse has succeeded in extending its franchise outside the confines of the CIA. L.J. Roberts, chief of material management for the National Imagery and Mapping Agency, shopped around for services he needed because he was facing reductions in his staff. He found that the Central Warehouse could meet his needs at the lowest cost to the taxpayer.

The Agency for International Development is among several agencies that employ the CIA's Transportation Service Center to armor automobiles for security purposes. "The CIA has been very responsive in the work we have given them for vehicles we will be using overseas," says David Blackshaw, chief of AID's Regional Security Support Branch. "I feel very comfortable with their high motivation and commitment to assuring quality control."

An important benefit of such external business for the CIA is to spread total costs more widely, thus cutting unit costs of services to internal consumers. "The business model is accomplishing its intended objectives-driving dollars back into mission, while adding value where the customer actually wants it," says Calder. Across its new businesses, reductions in service demand have been as high as 50 percent and the Administration Directorate has reduced its staffing significantly through early retirement, reorganization and attrition.

Culture Change

Skeptics within the CIA have looked askance at Calder's efforts, with especially strong doubts coming from the Directorate of Operations, the espionage component of the agency. Operations managers, focused sharply on difficult and often dangerous work, often considered choosing alternatives for spending support money a distraction rather than a benefit. "Throughout the agency, there was sticker shock when formerly 'free' services were fully priced," says Barbara Falgout, director of the Business Transformation Office.

While the first year of actual experience has resulted in substantial rebates, which managers in the Operations Directorate have been able to redirect to mission areas, fears persist that the situation could change-that Congress or higher executive branch officials might decide to use the savings for other purposes. CIA Comptroller Mary Sturtevant, a 15-year veteran of the agency and the Senate staff dealing with the intelligence community, considers such concerns to be exaggerated. Managers must realize that the days of limitless budgets are gone, she says, and that it's in their best interests to take control of administrative funds that were previously in centralized accounts.

As a longtime executive in the Operations Directorate, Calder understands the attitudes of operations managers. "As we began adjusting to this post Cold War environment, mission managers were willing to see support-the Administration Directorate-take the bulk of the budget cuts," Calder says. "Yet, when crisis issues develop, we have to be there-we are the enablers. So we have to have a conversation about what it is that they, as customers, really need from us.

"A year into it, what we are finding, despite the initial resistance, is that many of the same customers who once said 'Cost doesn't matter, we need the service,' are now saying 'Hey, why does this cost so much? Can we find a better way of doing this?' "

The Directorate of Intelligence, responsible for the analysis and production of finished intelligence, has been quicker to accept the new administrative approach. The deputy director of support services for the Intelligence Directorate says most managers support the changes in theory, but are carefully monitoring each enterprise as it makes the transition to the new business model to ensure that their needs are met.

The business transformation has made Intelligence Directorate managers more cost-conscious, and the directorate has been able to cut down on use of the agency's crating and shipping services, redirecting the savings into mission uses. However, other enterprises, such as telephone services and transportation services, have required reallocation of mission funds to meet support requirements. The deputy director of support services anticipates that Intelligence Directorate offices are likely to buy services externally for some of their training and unclassified printing needs. She adds that many of the issues are transitional in nature and likely will be resolved as the intelligence and administration directorates develop more experience in the new working capital fund environment.

Moving Ahead

Within his own directorate, Calder meets monthly with each enterprise manager, quarterly with the enterprise managers as a group and holds bimonthly town meetings with employees to discuss the ongoing transformation. He also holds periodic meetings with the other directorates to explain the need for change, the components of a competitive marketplace, the progress that has been made, and to listen to concerns of customers and his own staff that might call for corrective action.

Such mid-course corrections may be painful. As one senior Administrations Directorate employee says, "We must acknowledge where we're non-competitive." The rigorous review process is aimed at identifying such problems before a new enterprise enters competition, but the response of the customers will ultimately determine the outcome. If a new franchising operation actually goes out of business, and people lose their jobs, that will demonstrate that a true revolution is at hand.

Cathy Eberwein of the House Permanent Select Committee on Intelligence staff is encouraged by the initial success of the business model. "The administrative dollars saved are real and are being spent on mission," she says. Eberwein also cites an initial audit of the working capital fund and the recent findings of the CIA inspector general indicating the business transformation is beginning to achieve its objectives.

Calder says he's only a tenth of the way down the road to the full business transformation of his directorate. That's a view shared by a customer in the Directorate of Operations, who says that mission managers need a better understanding of the new approach. To go the rest of the way will require years of work to organize new businesslike ventures, to overcome continuing skepticism in the agency, and to create a new cost-conscious and entrepreneurial culture. Calder and his top lieutenants know that in the private sector, businesses thrive when overhead is kept low, and they are determined to apply that lesson within the closed world of intelligence as well.

Michael D. Serlin is a consultant on governmental change. He was the financial management team leader for the National Performance Review, and retired from the Treasury Department in 1994 after 36 years of federal service.

]]>

Buyer's Market

Michael D. Serlin — Tue, 01 Sep 1998 00:00:00 -0400

serlin@tmn.com

ederal program managers have more options than ever before in obtaining quality administrative support at low cost. That should be good news, given demands from Congress and the public for improved performance in a tight budget climate. Yet many managers are not aware of the growing spectrum of choices they have in such areas as payroll, human resources, information technology and financial and cost accounting.

Choice, quality and cost of administrative services are improving thanks to the age-old capitalist principle of competition. An unorthodox group of competitors is crowding the market-not only private firms, but also quasi-independent government units and other entrepreneurial operations within federal agencies.

The new market for administrative services has not emerged without controversy. Some in Congress argue that government entrepreneurs should not be in competition with private-sector service suppliers. But while that political debate continues, the market grows.

Already, managers can get support services from a variety of federal operations:

Consolidated administrative centers, in their own departments or others.
"Franchise fund" business units set up
under the 1994 Government Management Reform Act.
The business units of franchise-like funds established under agency-specific legislation.
Long-established "cross-servicing" operations like the Agriculture Department's National Finance Center, which provides payroll services to dozens of agencies.

In addition, managers can look to the private sector for services by:

Turning to former government specialists who have migrated to organizations operated under an employee stock ownership plan.
Issuing a task order against a governmentwide acquisition contract.
Buying services directly from a nonprofit organization or a commercial company.

Tight budgets and reduced staffs are driving development of the new market for administrative services. Agencies now employ some 316,000 fewer people than they did five years ago, forcing them to concentrate directly on their core missions. Administrative occupations were at the top of the list for reductions, leading to the widespread consolidation and outsourcing of support services.

Buying Support Services

At the beginning of the Clinton administration, Vice President Al Gore's National Performance Review introduced the term "franchising" to describe federal organizations that compete to provide administrative services, charging fees to cover their costs. It was an idea built on the practice that many agencies had been providing reimbursable services for years.

The 1994 Government Management Reform Act, which permitted six agencies to establish working capital funds to run franchise operations, specified that the franchises must be competitive and self-sustaining. Previous cross-servicing organizations were able to dip into appropriated funds to cover income shortfalls. In 1996, six pilot agencies were designated: the Environmental Protection Agency and the departments of Commerce, Health and Human Services, Interior, Treasury and Veterans Affairs. Recently, the Transportation Department and Central Intelligence Agency have obtained nearly identical legislative authority to operate similar funds offering services competitively.

Since 1994, many of the established cross-servicing agencies have continued or expanded their reimbursable business, and others not previously offering services have further crowded the field. Some of the new entrants are doing so for survival, having been told by their parent agencies that their staffs no longer can be sustained through shrinking agency appropriations. Leaders of others believe they are "best in class" and want to prove it by finding and retaining customers.

The plethora of federal organizations competing to offer reimbursable administrative support clearly has created a buyer's market. But it also has raised a series of questions. Are the sellers permitting managers within their agencies real freedom to buy services elsewhere? Are all providers counting the same costs in pricing their services? Or are some agencies subsidizing their reimbursable organizations with appropriated funds?

The Office of Management and Budget and a committee established by the government's Chief Financial Officers Council have been dealing with these questions as they relate to federal operations that compete both with each other and with industry. An OMB/CFO Council team developed 12 operating principles that now govern all franchise-type operations in the government:

Competition: Interagency support organizations cannot be monopolies and should offer services on a fully competitive basis.
Voluntary exit: Customers should be able to go elsewhere for services, after appropriate notice to the service provider.
Unsubsidized full cost recovery: Operations should be self-sustaining, with fees established to recover full costs as defined by federal accounting standards.
Surge capacity: Resources to provide for capital investments and peak business demand should be available.
FTE accounting: Staffing should be accounted for consistent with the Federal Workforce Restructuring Act and OMB circulars.
Initial capitalization: The organization should support enough staff to meet initial projected commitments.
Flexibility: Operations should maintain the ability to adjust capacity and resources up or down, as business volume or other conditions dictate.
Cessation of activity: Service providers should give reasonable notice when curtail-
ing or eliminating service.
Organization: Operations should maintain a clearly defined structure with separately identifiable units for accumulating and reporting costs and revenues, without commingling with another organization.
Services: Only common administrative support services should be provided.
Performance measures: Comprehensive performance measures should be used to assess each service provided.
Benchmarks: Organizations should maintain and evaluate cost and performance benchmarks against competitors.
These principles are also included in the OMB Circular A-76 Revised Supplemental Handbook of March 1996, which applies to all activities of the federal government that are subject to public-public and public-private competition.

An overlooked fact in the debate over public/private competition is that 75 percent of the reimbursable income received in the pilot franchise funds goes to private companies under contract to the federal franchises. In many cases, the franchise business units serve as consolidators for the needs of many small agency requests that, individually, would not provide viable marketing opportunities to private firms.

Facing Competition

Several agencies long have marketed their support services to other federal customers. Two prime examples are USDA's 25-year-old National Finance Center (NFC) and the Office of Personnel Management's Federal Executive Institute, now in its 30th year of operation. But both operations like the NFC, which specializes in payroll processing, and the FEI, which offers executive training, have faced competition from within and outside the government.

The NFC competes with similar operations at the General Services Administration and Interior to serve civilian agencies. And on the Defense side, competition for payroll services may be about to heat up. The Defense Finance and Accounting Service is scheduled to complete several A-76 studies next month, and could end up outsourcing some of its services to private firms.

The Federal Executive Institute has had competition from both for-profit and non-profit organizations since its inception. Graduate schools of public administration, such as Princeton University's Woodrow Wilson School of Public and International Affairs, Syracuse University's Maxwell School of Citizenship and Public Affairs, and Harvard's John F. Kennedy School of Government, have offered training for federal executives, often with private-sector students in the same classes.

Other traditional cross-servicing operations also are facing more competitive pressure, including some of the more than 20 Cooperative Administrative Support Units (CASUs) in cities around the country. The CASUs were formed to help reduce the duplicative overhead costs in cities with many different federal offices. They provide combined copying services and other support functions for all agencies in an area, with a lead agency coordinating the effort and receiving reimbursement from each agency for services received. But now, about half the CASUs have been converted into business units within franchise funds, meaning they will have to compete against private firms to offer their services.

New entries in the government services derby include two organizations offering the entire range of administrative services: the Central Intelligence Agency, which recently received legislative authority for a working capital fund patterned after the franchise funds, and the Treasury Department's Bureau of the Public Debt, whose administrative organization has recently been added as a business operating unit of the Treasury franchise fund. The Federal Aviation Administration, also operating under legislation patterned after the franchise funds, offers payroll, accounting and travel support, plus specialized training.

Another growing source of competition for federal support-services operations are formerly federal organizations that have been restructured as private companies operated under employee stock ownership plans (ESOPs). The first federal operation to be converted to an ESOP was U.S. Investigative Services Inc., which until two years ago was an OPM unit handling personnel background investigations for agencies. USIS officials say business is booming, and they have given employees, many of whom are former federal workers, large bonuses. As part of its startup commitment, OPM promised USIS three years of continued federal background investigative business.

Now a second ESOP is operating: Synectics AMEC, formerly the Army Management Engineering College. Synectics AMEC has a 1998 course catalog offering most of the same courses previously taught by the Army, plus an added curriculum on implementing the 1993 Government Performance and Results Act.

With all these choices, improved service and lower costs, one might guess that everyone is thrilled with the new more competitive environment for administrative services. But that's not necessarily so. Competition means risk, for buyers and even more for sellers.

Buyers-and Sellers-Beware

Many program managers complain that their agencies haven't yet given them control over funds for administrative services. Even when they do control the money, they're often pressured to spend it within their own agencies, if possible.

Another problem is the lack of comprehensive information on service providers. GSA provides an online directory of reimbursable services, but many of the newer reimbursable organizations have not yet sought to be listed. The Treasury Department's internal CFO Council is conducting a survey to identify all federal reimbursable support organizations. There is no equivalent source of information for all the private-sector alternatives. Competitors, public and private, do advertise (some in this magazine) and provide marketing materials directly or at conferences.

Even when full information is available to buyers, some sellers are concerned that the rules of competition are unfair. An issue of great concern is full cost accounting. Many commercial firms have complained that their federal competitors are able to hide costs when they bid.

OMB Circular A-76 requires adjustments for public-private competition to be sure the total cost to the taxpayer (not just the offering agency) is compared to the total costs (including the need to pay taxes) for a commercial enterprise. Pilot franchise organizations, particularly at Treasury and Veterans Affairs, have been developing full cost analyses for the business units in their funds. The CIA is using activity-based costing to calculate the full costs of its business operations.

Federal operations selling services had the additional advantage, until last October, of a temporary shelter allowing them to sign interagency agreements without going through the A-76 review and competitive process. Agency operations also have been able to boast that using their services will spare their federal clients the time-consuming and onerous process of procuring services competitively in the open market. That advantage is slipping away, because procurement reforms have enabled NASA, GSA, DoD, VA and others to establish governmentwide contracts against which agencies can issue individual task orders to obtain commercial help.

Freedom from Competition

OMB attempted to address the new environment for procurement of support services in its 1996 revisions of Circular A-76. The revisions changed the previous "either-or" dynamic, in which an agency's choices for support services involved having their own employees do the work or buying services from a private firm. The circular now addresses a third option, under which agencies would purchase services from another federal operation.

Administration officials say the new circular better addresses the options agencies face today. They cite active Defense Department A-76 cost-comparison studies as evidence that agencies are taking seriously their obligation to get services at the lowest possible cost. However, among civilian agencies there has been diminishing use of A-76 studies over the past decade, to the point that during fiscal 1997 no civilian agency was doing a study, according to the General Accounting Office.

Even if A-76 competitions were expanded, many private firms don't think they should have to compete against government entrepreneurs to win agencies' business. They have the support of several members of Congress.

Earlier this legislative session, Sen. Craig Thomas, R-Wyo., and Rep. John J. Duncan Jr., R-Tenn., reintroduced their Freedom from Government Competition Act, which sought to prevent agencies from providing "commercial services," a term that could cover support services and much more, from renting out cabins at national parks to operating research and development laboratories.

The proposed legislation won the support of the Coalition for Taxpayer Value, organized under the auspices of the U.S. Chamber of Commerce. But the Clinton administration and federal employee unions opposed the bill.

In March, G. Edward DeSeve, OMB's acting deputy director for management, listed seven principles the legislation would need to incorporate in order to gain administration support:

The government could choose the public or private source that was most cost-effective and in the best interest of the taxpayer.
Legislation should not increase the involvement of the courts in reviewing decisions on whether to outsource.
Management documentation, employee participation, costing and source selection rules for competition must be well understood so as to be enforceable and impartial.
Source selection processes must permit efficient and effective competitions between public and private offerors for work presently being performed by the government or by a private contractor.
When an activity currently being performed in-house is put up for bid, employees must get an opportunity to compete to retain the work.
Legislation should not impede agencies' management improvement initiatives.
Competition should not be treated as independent from other reinvention and management improvement efforts.

Eventually, the bill's supporters changed it to permit public-private competition. But even in that form, the administration and unions refused to endorse it. Finally, in July, after lengthy negotiations with the interested parties, the Senate Governmental Affairs Committee approved a substitute bill, known as the Federal Activities Inventory Reform Act. The House Government Reform and Oversight Committee also included the measure in a procurement reform bill it approved in July.

The new measure would simply require agencies to create lists of services that could be performed by private firms. The lists would be made public through announcements in the Federal Register. The bill instructs agency heads to review the lists annually to determine if the programs should be outsourced.

Regardless of what happens with the legislation, it's clear that in the future, federal managers will increasingly be looking outside their own agencies for a wide variety of administrative services. The era of competition-and, in theory, lower prices and better services-is at hand. The manager's job is to learn how to take advantage of this new world.

Michael D. Serlin is a consultant on government change. He was the financial management team leader for the National Performance Review, and retired from the Treasury Department in 1994 after 36 years of federal service.

]]>

Services for Sale

Michael D. Serlin — Tue, 01 Sep 1998 00:00:00 -0400

serlin@tmn.com

ederal organizations offer a wide variety of administrative support services under interservice support agreements. Here's a partial list:

Accounting services
Acquisition management
Adaptive technologies for the physically challenged
Administrative systems and support services
Auditor training
Clinical occupational health
Collaborative consulting with leaders
Computer repair and maintenance
Conference room management
Copier management
Court reporter services
Customer-oriented police officer training
Employee assistance programs
Engineering
Environmental compliance
Environmental health
Equipment rental
Facilities management and services
Federal benefits information systems
Financial education and training
Financial management consulting
Financial systems consulting
Information technology
Laser cartridge services
Leasing
Mailroom and management services
Messenger service
Moving services
Office automation training
Payroll processing
Personnel services
Postal services
Procurement services
Records management
Resource management
Secure off-site records storage and destruction
Security investigations
Space planning and design
Telecommunications
Telecommuting support
Temporary help
Training services

]]>

For More Information

Michael D. Serlin — Tue, 01 Sep 1998 00:00:00 -0400

serlin@tmn.com

Having trouble understanding the new lingo of entrepreneurial government? Last year, the General Accounting Office published a glossary, Terms Related to Privatization
Activities and Processes (GGD-97-121).

To help ease the adjustment to the new competitive environment for support services, several organizations have formed a voluntary self-help organization, Government Agencies in Partnership, to promote cooperation and sharing information among organizations operating under franchise funds or working capital funds. GAP can be reached at www.gap.fed.gov on the Web.

The General Services Administration maintains an online directory of reimbursable government services at www.gsa.gov/reimburse.

The Entrepreneurial Government Committee of the U.S. Chief Financial Officers Council can be found at www.financenet.gov/fed/cfo/franchiz.

Sites for agency commercial operations include the following:

National Finance Center (Agriculture): www.nfc.usda.gov

Washington Administrative Service Center (Interior): www.usgs.gov/wasc

Denver Administrative Service Center (Interior): www.dasc.doi.gov

FAA Franchise Fund (Transportation): www.mmac.jccbi.gov/franchise

Gateway to Franchise Business Activities (Treasury): www.ustreas.gov/franchising

Austin Automation Center (Veterans Affairs): www.aac.va.gov

Financial Services Center (Veterans Affairs): www.fsc.va.gov

]]>

In the Ring

Michael D. Serlin — Mon, 01 Sep 1997 00:00:00 -0400

he word "competition" has all kinds of positive connotations in the American market system: higher quality, lower costs and better service. Yet powerful as it is as an engine of the private sector, competition has had little application in government, where monopolistic thinking has long prevailed.

But times are changing. Now competition is in vogue as a means of reforming the public sector in places as diverse as New Zealand, the commonwealth of Virginia, the city of Indianapolis-and the federal government.

The idea of putting some government services up for sale to the highest bidder has broad appeal, but current efforts to encourage government to be more entrepreneurial have raised a series of tricky questions. Should agencies be allowed to compete against private firms for the business of other agencies? If so, how do you establish a basis for comparing bids among entities that don't have common accounting practices, tax obligations or profit requirements?

These questions, long the province of academicians and government practitioners, came sharply into focus in May, when the Federal Aviation Administration awarded a data center contract worth up to $250 million to the Agriculture Department's National Information Technology Center in Kansas City. All of a sudden, a little-known government office bested IBM and Computer Sciences Corp. in a contract fight.

In front-page stories in the Washington Post and elsewhere, industry officials complained that the bids hadn't been properly adjusted to account for taxes and other factors. FAA delayed implementing the pact to determine whether contracting officials had fully complied with Office of Management and Budget Circular A-76 guidance on calculating whether services can be provided more cost-effectively by private firms. In early June the USDA Center was confirmed the winner.

Then Congress got into the act. A previously unheralded measure, the Freedom from Government Competition Act (S 314) assumed a higher profile. Witnesses and spectators turned out in force when its sponsor, Sen. Craig Thomas, R-Wyo., held June hearings on the bill before a Senate Governmental Affairs subcommittee.

The U.S. Chamber of Commerce is among business groups supporting the legislation. Robert Raasch, its associate manager for domestic policy, says, "the current A-76 process is purely voluntary, with counter-incentives for agency managers to deal with it seriously. This bill would provide federal managers with the cover they need to perform a true cost comparison with the private sector."

The bill's chances of becoming law increased markedly in July, when its key provisions were included in the Senate's version of the fiscal 1998 Treasury and General Government appropriations bill.

Administration officials, though, take a dim view of the legislation. They say recent revisions in A-76 are sufficient to ensure fair competition between public and private competitors. The revised A-76 handbook, says OMB controller Edward DeSeve, "is leveling the playing field for the widest possible competition, not shutting out either the commercial sector or federal agencies from competing. The benefits of competition should assure continual improvements in service as well as lowering costs to provide the best value to the nation's taxpayers."

Testifying in June, then-OMB deputy director for management John Koskinen said the legislation could lead to frequent challenges in court for what are today seen as ordinary management decisions.

Thomas and the bill's leading House sponsor, Rep. John J. Duncan Jr., R-Tenn., said that the bill merely seeks to codify in law a policy supported in principle but not in practice by both Republicans and Democrats: that government should not perform functions that can equally well be done by the private sector.

On two points, the two camps are in agreement: The federal government should be no larger than necessary to accomplish its functions effectively and efficiently, and the taxpayer should be getting best value for the dollar. But that's about all they agree on.

Even the term "privatization," central to the idea of competition in government, has different meanings for different people. To some, it means eliminating government involvement in any way with certain functions, while to others it simply means a significant increase in government contracts.

Further complicating the debate is the often-overlooked distinction between federal program activities (such as running national laboratories or camping facilities at national parks and forests) and those functions (such as payroll processing) that fall under the loose category of "administrative overhead." Most of the debate in recent months has centered on how to define fair public-private competition for such support services.

Outsourcing Overhead

The federal government currently spends $114 billion a year on commercial support services contracts. Every federal agency has a wide spectrum of choices for seeking administrative support. The FAA's data center support, for example, could be done by private contractors. It is not "an inherently governmental activity," a phrase commonly used to denote operations that should not be contracted out. The agency's range of choices included:

Operating an FAA-owned data center staffed with agency employees.
Using a consolidated Transportation Department data center, with federal and contract employees.
Contracting with another agency through an interagency support agreement.
Turning the function over to a new organization made up of former FAA employees established through an employee stock ownership plan (ESOP).
Contracting with a private company to run a government owned data center.
Contracting with a private company that would own the data center.

The last option clearly constitutes privatization, and most experts would also consider an ESOP plan or a government-owned, contractor-operated center to be forms of privatization. While the first three options also would involve commercial contracts for computers, software licenses, and other support, they would not normally be defined as privatization.

Wake-Up Call

FAA's managers decided that either contracting with another agency or letting a private company run and own the data center were the best options for lowest-cost, highest-quality support. So they allowed a full and open public-private competition. They were not averse to industry-their previous data center operator was a private company-but they wanted the best deal.

Six proposals were submitted. In addition to three private firms and USDA, the Defense Information Systems Agency (DISA) and the Department of Transportation's Administrative Service Center (TASC) also bid. The award to the USDA center served as a wake-up call to many industry officials, who had not previously taken the shift to entrepreneurial government competition seriously.

Reaction to the award brought to mind the film Citizen Kane, in which newspaper publisher Kane runs for mayor of his city. With early returns looking favorable, his paper prepares the banner headline, "Kane Wins!" As it becomes obvious that he will lose, his assistant editor proposes an alternate headline: "Fraud at the Polls."

Under the old government contracting practices, it was almost routine for companies that didn't win to file protests, complaining that something about the award was unfair, rather than accept that the winning company had made a better bid. Recent procurement reforms have reduced the frequency of protests, but with entrepreneurial agencies entering the bidding, the familiar cry is being heard anew.

There is some basis for the complaints. Most federal agencies don't yet have accurate cost accounting practices. Traditional federal budgetary accounting has not included a number of centralized costs. Adjustments required under Circular A-76 are intended to level the playing field, but still involve a lot of uncertain estimating.

"We are continually improving the accuracy in identifying all federal costs to level the playing field," says DeSeve.

Franchising's Foundations

The Clinton administration's National Performance Review encouraged agencies to get into the business of selling their services. In 1993, the NPR recommended agencies establish fully self-supporting, business-like units, dubbed "franchises," for services they could sell to other agencies. "Franchise funds" (revolving funds permitting a percentage of retained earnings to be carried over between fiscal years) were authorized to accumulate money for capital investments to modernize or deal with cyclical demands.

The idea behind franchising was to help reduce the number of people in administrative overhead positions in government by allowing agencies to outsource some of these functions to other agencies.

The recommendation was incorporated in the Government Management Reform Act (GMRA) signed into law in October 1994, but was limited to a five-year demonstration project involving six pilot agencies. The first officially designated franchise fund agencies began full operations in October 1996. The project is scheduled to run until 2001.

When GMRA became law, a committee of the Chief Financial Officers Council argued that there must be a level playing field within government to provide true competition among agencies vying for administrative support business. That competition wasn't limited just to the six agencies with franchise funds. Under heavy budget pressure, a number of other agencies, some with existing revolving funds, had begun working to expand their business with federal customers.

The CFO Council developed 12 operating principles for business-like federal organizations. They stressed full competition, with the franchise organizations operating on a self-sustaining basis with full cost recovery and no "captive" customers, such as their home agencies.

The CFO Council established a temporary shelter for franchises and other similar entities to obtain new business or expand without requiring full competition. The shelter expires on Oct. 1, when full and open competition, public and private, will be required.

Experiments in Management

A year into their full operation, the six pilot franchise funds have set up more than a dozen separate businesses that have taken in more than $290 million in sales. The franchise fund agencies have experimented with varying approaches to managing their operations.

The Interior Department has established its franchise fund as a separate entity and has had some success in winning new customers in competition with other agencies. For example, Interior's Denver Administrative Support Center beat out the Agriculture Department's National Finance Center and the Department of Health and Human Services for a contract to provide payroll services for the Social Security Administration in fiscal 1998.

The Treasury Department's six franchises range in size from the small but highly visible Federal Quality Consulting Group, with less than $1 million in business annually, to the Center for Applied Financial Management, which has more than $11 million in revenues. Treasury's other four franchises are cooperative administrative support units (CASUs), which provide shared support services for agencies. The CASU units are headquartered in Los Angeles, Seattle, Baltimore, and Cincinnati. The Los Angeles operation, CASU-West, has more than 180 customers, generating nearly $10 million a year.

"We chose to begin the franchise fund with existing entrepreneurial organizations with proven track records," says Steven App, Treasury's deputy chief financial officer and its franchise fund manager. "While the discipline of our controls assures that each separate franchise succeeds or not on its own, the peer pressure among the separate franchises, which meet quarterly, leads to better business practices. The synergy among them also leads to referrals, bringing increased business for all."

The Commerce Department has two franchises under its fund-the Office of Computer Services, at the department level, and the Administrative Support Centers of the National Oceanic and Atmospheric Administration.

Aggressive marketing by the Office of Computer Services, combined with a strategy of supporting virtually all of the commercial off-the-shelf accounting packages on the GSA schedule, have tripled the unit's revenue since 1994. During the same period, employment was cut by 30 percent. Only 50 percent of staff costs are borne by Commerce now, down from 100 percent in 1994. And customer fees are lower than they were three years ago.

The NOAA unit, which offers procurement assistance to agency customers, administers more than $10 million in contracts with commercial providers on behalf of several agencies outside Commerce.

The Department of Health and Human Services' franchise fund includes the long-standing entrepreneurial Federal Occupational Health organization. The Veterans Affairs Department has seven franchises under its franchise fund, but the two largest operations, its Automation Center and its Finance Center, have not yet developed a coordinated strategy for customer growth outside the department. The Environmental Protection Agency, which did not have an ongoing entrepreneurial organization when it was awarded a franchise fund, has not yet begun operating a franchise offering services outside the agency.

To show the variation in franchise fund operations and other support service providers, the National CASU program has established an electronic "yellow pages" of such operations on the World Wide Web (www.gsa.gov/reimburse).

To a large extent, these franchisers operate as brokers or general contractors, meeting agency needs by subcontracting to commercial providers. Between 41 percent and 87 percent of all revenues franchises receive are ultimately spent in the private sector. The advantage of this for small businesses is that the franchises serve as consolidators, doing the marketing to hundreds of individual agencies that would otherwise be prohibitively expensive for small companies. The advantage to agencies is that concentration of orders can result in better prices.

State, Local Lessons

While the federal franchising movement is just beginning to expand, public-private competition initiatives are increasingly common in state and local government. Five of these initiatives were examined by the General Accounting Office in a report published last March.

L. Nye Stevens of GAO's General Government Division testified in June about six lessons state and local leaders had learned from their experiences. The officials found they needed:

Committed political leaders championing the privatization initiative;
An organizational and analytical structure to implement the initiative;
Legislative changes and/or reduced
resources available to government agencies to encourage greater privatization;
Reliable and complete cost data on government activities to assess their performance, support privatization decisions, and make these decisions easier to implement and justify to potential critics;
Strategies to help their workforces make the transition to a private-sector environment; and
Enhanced monitoring and oversight to evaluate compliance with the privatization agreement and evaluate performance.

Indianapolis and Virginia have developed formal analytical frameworks for selecting activities for potential privatizing, and monitoring subsequent performance. Both frameworks strongly emphasize cost. The Virginia Commonwealth Competition Council has recently developed a PC-based program managers can use in reviewing a function for contracting out.

Competition Cuts Costs

Research is already showing that the federal sector is benefiting from cost comparisons, too. A study by the Center for Naval Analyses of more than 2,000 Defense Department A-76 competitions from 1978 to 1992 shows half resulted in contracting, while in the other half, work remained in the government unit. Either way, the competitions resulted in cost savings ranging from 22 percent to 35 percent, and the quality of performance and labor productivity remained high.

DoD has had an incentive to deal seriously with A-76, since the money it saves through the competitions can be redirected into weapons development rather than returned to the Treasury.

Many civilian agencies cannot reprogram the money they save so easily, which has been one of the main factors contributing to less frequent consideration of commercial and competitive alternatives. Indianapolis has a "gain sharing" provision that has contributed to support for public-private competition among both agency managers and employees.

The other problem with the old A-76 process is that it is long and paperwork-intensive. An entire industry of consultants has grown up around it to guide agencies on how to avoid losing work to the commercial sector. The revised A-76 is less cumbersome, and provides for actual rather than theoretical competition between federal entities and commercial companies.

Lost Leaders

Despite the obstacles to public-private
competition, members of Congress, the Clinton administration, and, surprisingly, even federal employee unions have voiced support for the idea. John Sturdivant, president of the American Federation of Government Employees, testified in June that his union, which represents almost 700,000 employees, is not opposed to competition, but simply wants to be among the competitors. Sturdivant said A-76 is working, with functions involving more than 40,000 positions currently under review. The assumption that the private sector is always better and cheaper is proving false, he said.

But in the administration, leadership for entrepreneurial efforts and other long-term change initiatives suffered this summer with the departures of Elaine Kamarck, Vice President Gore's key adviser for the reinventing government initiative, and OMB's Koskinen. They had worked to keep the political focus on management reform, to pressure the agencies to recognize the need for change, and to inspire career executives servants to implement new initiatives.

These career officials are critical to sustaining efforts to create entrepreneurial government. After Clyde McShan II retired from Commerce this year, his role as the champion within the Chief Financial Officers Council of franchising pilots and other federal entrepreneurial efforts has been taken over by Dennis Fischer, chief financial officer for the General Services Administration. Fischer guided the CFO Council review of the reissued A-76, recommending modifications to assure a level playing field for all public and private competitors on administrative support contracts. Another key player has been Chicago-based Dr. Ernest Hardaway of HHS.

One Size Won't Fit All

The new Interagency Council on Administrative Management, established by executive order 13048 of June 10, 1997, could play an important role in determining the future of entrepreneurial government initiatives. Patterned after the Chief Financial Officers Council and the Chief Information Officers Council, it is headed by the OMB deputy director for management and will consist of senior administrative management officials from all the departments and major agencies.

Regardless of what happens with these and other change efforts, the fresh breeze of competition is clearly blowing through the federal government. It is creating a market for the provision of administrative services, with both public and private sector suppliers competing for contracts.

There is no reason to think that this trend toward competition will be limited purely to administrative functions. Indeed, the Freedom from Government Competition Act deals as much with federal program activities that could be accomplished by the commercial sector. The role of Defense and Energy department laboratories in performing non-R&D work, for example, already has been questioned by private-sector officials.

Other examples abound. Providing overnight camping or lodging facilities may be consistent with the National Park Service's programs, but what if there are commercial campgrounds nearby?

The roles and capacities of government and industry have changed and will continue to evolve. One size will not fit all, and certainly not for all time. If the objective is to provide best-value services to the taxpayers, while increasing opportunities for commercial companies, laws that have become obsolete with the passage of time and advances in technology need to be eliminated.

Likewise, federal cost accounting procedures must be improved. There's progress to report in this area, thanks in part to pressure exerted by the National Performance Review to have the Financial Accounting Standards Advisory Board speed up development of federal cost accounting standards.

FASAB issued new standards two years ago, and now they're being used to install new systems in more and more agencies-especially those interested in joining the movement toward entrepreneurial activity in the new era of competition for government services.

Michael D. Serlin, a retired federal executive, led the National Performance Review's financial management team. He is currently an adviser on governmental change.

]]>

The Competitors

Michael D. Serlin — Sat, 01 Jun 1996 00:00:00 -0400

he bracing breeze of competition is about to begin blowing through the halls of the U.S. government, pitting agencies against one another in a race to sell their services to colleagues throughout the federal bureaucracy.

One can envision the day, not far in the future, when an agency might publish an ad like this:

Such a world may seem galaxies away from today's practices, which don't feature much entrepreneurship on the part of federal employees. But under the authority of a 2-year-old law, six agencies are about to start up so-called franchising projects under which they'll be hawking administrative services to other units of government. The projects are full of risks-both for the agencies that will be operating the franchises and for their customers as well. But if they succeed they'll be a model for a government that's less turf-conscious and more willing to consider outsourcing of services, both to other agencies and to the private sector. A franchising conference on the future of competitive reimbursable government services is scheduled for this month in Washington.

The franchising movement builds on an idea as old as 18th century philosopher and economist Adam Smith-that efficiencies can be derived from competition, specialization and intelligent division of labor. It's not a wholly new idea in government circles; for several years a small number of agencies have been providing common support services on a reimbursable basis to other agencies. This so-called "cross-servicing" was encouraged by the Reagan Administration and its most visible example was and is the big payroll record-keeping and accounting operation run by the Agriculture Department's National Finance Center in New Orleans. The NFC services more than 100 federal agencies. Another example is found in the Public Health Service's Federal Occupational Health Services organization, which markets health promotion activities to federal offices throughout the United States.

These kinds of operations have been growing slowly. But the numbers are about to grow exponentially as "franchise funds," authorized by the 1994 Government Management Reform Act (PL 103-356), begin operations this year. The range of franchise services proposed within these six funds runs the gamut of support functions, from payroll and accounting to security, computer services, telecommunications, procurement, facilities management, consulting, travel management, copying and printing, personnel management, health services and specialized training.

The six agencies offering these services can see an obvious benefit. By broadening the market for their services, they'll be able to generate more revenue that can be used to enhance staff and upgrade facilities. At the same time, they will shoulder some risk. If their services do not prove salable, they have no guarantee that their franchise operations will stay in business.

For agencies on the buying end, the promise of reduced cost and reduced headcount is balanced by the risk of signing up for services that might not be delivered as promised. They might have better luck with another provider, but once an agency decided to relinquish its own administrative services capabilities, it could be difficult to reestablish them. For these reasons, among others, managers in many agencies have long been reluctant to allow contracting out of support functions.

The Franchising Movement

"Franchising" was the name used by the National Performance Review's 1993 report to describe a practice for providing administrative services that had at least three key characteristics:

1. The services would be offered on a competitive basis, with providers bidding for the business they wished to secure.

2. The services would be reimbursable by transfers of funds from the contracting agency to the service-providing agency.

3. The service providers would meet basic standards and be self-sufficient, with revenues covering costs of operations without subsidies from parent agencies.

The NPR's goal was to promote efforts to reduce federal overhead by cutting down on the cloning of staff support functions in virtually every agency of government (and often at the subagency or regional level). It proposed to end the staff support operations' monopolies in the agencies by giving managers a choice in finding the best service value for the dollar.

The Office of Management and Budget proposed legislation in support of this NPR recommendation that called for establishing franchise funds in every agency. These revolving funds would provide the working capital needed to allow individual franchises to operate as businesses, giving them start-up money for such functions as planning and marketing. Congress preferred a more cautious approach, approving establishment of six franchise funds on a pilot basis in the Government Management Reform Act (GMRA), signed into law in October 1994. Selection of agencies to establish these funds was left to the executive branch, in consultation with Congress. A five-year pilot phase is expected to run through 1999, with a proposed extension to 2001.

The opportunities and flexibilities permitted by the act, and the process by which the pilot agencies would be selected, were described by officials from an interagency working group and from the Office of Management and Budget at a February 1995 briefing. Then applications were sought from interested agencies.

Briefers described some of the advantages that would accrue to the six pilot agencies. Those that didn't already have a working capital fund would obtain one. The new funds could retain up to 4 percent of their "profits" to fund capital and other investments to improve operations, and to cover temporary lulls in business volume. Agencies needed to determine which functions they felt confident about including in a franchise fund proposal. Applicants were evaluated on seven key criteria:

1. Their ability to meet the intent of franchising by fostering competition among agencies for the provision of services.

2. The support they could demonstrate for franchising within their own agency and among relevant congressional committees.

3. Their ability to overcome any impediments that might be suggested by legislative or regulatory directives.

4. The soundness of the proposed organizational structure and operating procedures.

5. Their ability to help capitalize the operation through transfer of dollars, people and equipment.

6. Their ability to manage resource constraints, including fluctuations based on customer needs; to meet customer service and other performance standards; and to reduce costs and enhance productivity.

7. Their planning for contingencies, including the possibility of ceasing operations if the franchise proved unsuccessful.

Eight applications were completed by departments or independent agencies. Several others with existing revolving funds and reimbursable authority did not apply. Ultimately, the CFO Council, an interagency group that promotes management reforms, proposed OMB approve the plans of six agencies: The departments of Commerce, Health and Human Services, Interior, Treasury and Veterans Affairs, and the Environmental Protection Agency.

After additional discussion with OMB review staff, five were approved and consultation with Congress began. The sixth application, from HHS, was limited to a single franchise, the fully functioning Federal Occupational Health organization. The amend-ed HHS proposal was cleared in April by OMB, and the congressional consultation process started.

The six funds will offer a broad array of services. It's clear that agencies will frequently compete with one another. Payroll services, for example, will soon be offered by at least seven agencies, some with and some without franchise funds: the Veterans Affairs Department, the Commerce Department's National Oceanic and Atmospheric Administration, two units of the Interior Department, the Transportation Department's Federal Aviation Administration, the General Services Administration and the Agriculture Department's venerable National Finance Center.

While the franchise funds will be managed in Washington, many individual franchise operations will be run in field installations. The Treasury Department previously had lead responsibility for Cooperative Administrative Support Units (CASUs) in Los Angeles, Baltimore, Cincinnati and Seattle. Now the CASUs will operate as franchises, reporting to the Bureau of Public Debt while using the Financial Management Service's Center for Applied Financial Management to administer the franchise fund. Both the Veterans Affairs Automation Center and its Finance Center in Austin, Texas, are among the franchises, as is Interior's Denver Administrative Service Center. Most of the franchises, other than the CASUs, offer services nationwide.

The Federal Aviation Agency's Aeronautical Center in Oklahoma City is not a GMRA pilot, but plans to operate in similar fashion. The center proposes to offer international training, accounting, payroll, travel, duplicating, multimedia (visuals and TV production), and information technology services. FAA's proposal was examined by the franchising working group, and was deemed to have a strong potential to succeed. As a result, OMB and the Transportation Department have been working with Congress to establish an administrative services fund, with the same characteristics as the GMRA franchise funds. Other agencies continue to offer entrepreneurial administrative services under existing authorities, either through their own working capital funds or under the 1932 Economy and Efficiency Act.

Taking a leaf from the success of the CASUs, and in compliance with the philosophy of the GMRA legislation, customer representatives sit on franchise fund advisory boards and boards of directors.

Prospects for the Funds

Risk-taking entrepreneurial activities clearly counter traditional organization and methods in large bureaucracies. So what has caused the increased interest in federal franchising? And what is the likely impact?

Though there's long been talk of cutting overhead costs so that agencies can concentrate their resources on their primary missions, there was little action so long as budgets were stable or growing. Now, steep cuts in appropriations have forced many agencies to consider sharp downsizing of their staff support offices.

The choices have been to consolidate and eliminate staffing, purchasing the services from other agencies or private industry, or to retain and enhance staff capabilities by offering reimbursable services to other agencies. Closing down the weaker staffs and purchasing services from more efficient, customer-oriented ones can bring an agency a better, cheaper product. Conversely, letting a truly effective staff provide reimbursable service to other agencies can retain a talented workforce.

While it has taken a downsizing crisis to force many agencies to look for alternative ways to reduce their overhead budgets, one benefit from the many innovative entrepreneurial efforts has been to increase pressure on all support staffs to become more customer-oriented. This includes agency staffs, operating in the traditional appropriated structure, who know that their clients now have choices to exercise.

S. Anthony McCann, staff director of the House Appropriations Subcommittee on Labor, Health and Human Services, and Education, points out that "revolving or franchise funds provide powerful incentives to administrative and support functions to become more efficient, reduce costs, and improve services they provide to customers." McCann, previously the first chief financial officer at Veterans Affairs, adds, "They provide models of how administrative support activities can maintain and refresh technology and assure adequate training of employees to keep their skills current."

Formidable Obstacles

Franchising faces formidable obstacles. The people who advise senior line managers are the key support staffers, and few willingly seek to reduce their own staffs in order to obtain services elsewhere. While on a governmentwide basis there can be significant reductions in the number of people providing staff support, in individual agencies there is strong staff self-interest in letting those reductions take place elsewhere. Even though there may be four or five franchises competitively offering a particular staff service, some agencies may require their managers to use the in-house staff. Agencies that continue to mandate use only of internal staff will come under increasing pressure to change.

In a bureaucracy, preservers of the status quo seldom oppose change by direct confrontation. Slow strangulation with red tape is the weapon of choice. Several impediments to the growth of franchising were identified early by the working group and CFO Council. They were confronted and efforts were made to mitigate them.

One significant obstacle was the full time equivalent (FTE) control system. Agencies were concerned about letting their franchises hire people based solely on reimbursable income and customer demand when this hiring would affect agency efforts to meet reduced FTE ceilings. The CFO Council developed a system under which business-like entrepreneurial organizations can receive increased FTE ceilings for which they have the requisite funding.

A second problem, now temporarily resolved, involved the potential application to the franchising movement of OMB Circular A-76, issued years ago to govern contracting out of services to the private sector. A-76 was developed to foster private sector competition for government services while offering protection for federal employees who could provide these services as cost effectively. The A-76 process requires a detailed study comparing governmental entity and private sector bids. The agency staff retains the work if the private sector cannot accomplish it for at least 10 percent less. When GMRA was signed into law, A-76 required agencies considering purchasing support services (whether from the private sector or another agency) to go through this time-consuming, paper-intensive process .

The franchising effort encourages competition among federal entities, not lengthy procurement studies. Since one of the purported benefits of franchising is that agencies could swiftly purchase services from other agencies, imposing A-76 on internal competition among agencies would defeat the purpose. So OMB has exempted franchises started before October 1997 from A-76. Some franchises have begun marketing themselves by stressing the relative ease with which agencies can purchase their services. Materials circulated by the Commerce Department's Office of Computer Services, for instance, say "the center has streamlined the procurement process to a simple memorandum of agreement."

One irony of the temporary A-76 exemption is that most federal franchises make significant use of private contractors. They hire them to cover workload surges and specialized skill areas. Another irony is that the exemption vitiates a key objective of the franchising program: ensuring that agencies get services at the lowest cost. Industry surely will not be pleased by the A-76 exemption, but at the moment there is no consensus on the best way to assure a level playing field while achieving the lowest total cost to the taxpayer.

A third obstacle to franchising can be found in the relationships between individual franchises within a fund and their parent agency. History suggests that when some agencies began cross-servicing others in exchange for reimbursement, management in the service-providing agency used the revolving reimbursement fund to pay for agency overhead functions instead of supporting the cross-servicing business. By adding substantial overhead charges onto reimbursable pricing, parent agencies have priced their entrepreneurial offerings out of the market. This was one of the factors contributing to the business decline suffered by the Office of Personnel Management's training function, which has now been shifted to the USDA Graduate School, a more entrepreneurial setting. Parent agencies also fear losing control of their franchises.

Adopting Business Practices

This leads to a final problem likely to cause much debate over the next several years. As Schuyler Lesher, Deputy CFO at Interior points out, "Equitably addressing full cost accounting for franchises and for any federal agency providing support services to others is essential if the benefits are to be achieved." Susan Spurling, project leader for the Veterans Affairs franchise fund, agrees. "One of the biggest challenges facing the franchises is defining their services in terms of products they can identify and the customer can recognize," she says. Full pricing of those products and services will be critical to achieving the level playing field needed to assure agencies can obtain the best overhead services for the fewest dollars.

As Government Executive was going to press in early May, congressional concurrence was imminent for five initial franchise funds, those at Commerce, Interior, Treasury, VA and EPA. This was to be followed immediately by a letter from OMB permitting them to establish franchise funds under GMRA. The flexibilities these revolving funds will provide, including the authority to retain earned funds for reinvestment in capital equipment and to cover temporary lulls in business, should permit them to operate in a businesslike environment. Individual franchises will then stand and grow (or fall) based upon the quality of the services they provide, the price at which they provide them, and their marketing ability. They will be dealing with customers who have alternatives, so none will be able to avoid the hard work of continually striving to improve.

Dr. Ernest Hardaway, a Public Health Service Captain who is vice president for employee assistance of the Federal Occupational Health program, spent 14 years in the Public Health Service, when it was a traditional appropriated activity. He has spent the past 10 years in the entrepreneurial Federal Occupational Health program. "The primary satisfying difference is that when you have good ideas for greater effectiveness, you have fewer constraints in actually getting them implemented," he says. "It is an operational laboratory, with customers rather than hierarchy determining your ultimate performance measures."

Even in the world of the Internet, communication in the vast federal government is uneven and often slow. One reason people are often frustrated with staff support organizations in their agencies is that the staffs are frequently unaware of the latest flexibility offered in a presidential directive or General Accounting Office opinion. Franchising competition puts the pressure on agencies to keep up to date.

Many agencies are only beginning to learn about the opportunities provided by franchising. Efforts to spread the word began a year ago at a franchising workshop at George Mason University in the Washington suburbs. The 1996 Franchising Workshop is scheduled for June 19 and 20 at the Bureau of Labor Statistics training center near Union Station in Washington. Sponsors are the National Performance Review, the National CASU Project and the CFO Council. There are plans to have ready by that time an updated directory of reimbursable services, in effect a Yellow Pages of government entrepreneurial staff support organizations, as well as an operating guide for franchises.

Change does not come easily, even when accelerated by a crisis, but competition in support services can clearly help managers cope in an era of diminishing resources.

]]>

Born-Again Financial Management

Michael D. Serlin — Wed, 01 May 1996 00:00:00 -0400

nteragency cooperative teams sometimes work effectively in a crisis, but rarely function well over a sustained period. There are many examples of interagency councils and committees that began with lofty intentions but withered away.

The Chief Financial Officers Council, established by the 1990 Chief Financial Officers Act, was well on its way to becoming one of those moribund teams by the end of 1992. Today it is thriving, providing cooperative leadership, along with the Office of Management and Budget and the Treasury Department, in implementing some of the most far-reaching bipartisan government management reforms ever enacted-the 1993 Government Performance and Results Act, the 1994 Government Management Reform Act, and the CFO Act itself.

What's the story behind the CFO Council's revival? Can the Council sustain its success?

Creation and Insurrection

The passage of the CFO Act in 1990 came as something of a surprise. Various drafts of the bill had been introduced in Congress for years. But since legislators generally considered management reform about as exciting as sorting cranberries, there was little expectation it would pass. When it did, each department and several large independent agencies quickly had to appoint chief financial officers. In most cases, a political appointee already in place (usually an assistant Secretary for management or administration) got the new job. Some of these appointees had financial management backgrounds, but many did not.

To get the new financial officers to work together, the law created a Chief Financial Officers Council, to be chaired by the OMB deputy director for management. But by the end of 1992, council meetings were reduced to briefings by staffers from OMB's Office of Federal Financial Management (also created by the 1990 law), with minimal interest and support from the agency CFOs.

The start of the Clinton Administration in 1993 provided an opportunity to fill agency CFO positions with political appointees with financial management backgrounds. Phil Lader, then the deputy OMB director for management, along with Ed Mazur and Hal Steinberg, former OMB controller and deputy controller, respectively, worked with White House staffers to get qualified financial people into CFO jobs. For the most part, they succeeded.

Appointing qualified CFOs did not automatically forge them into a team, but an initiative begun by several CFOs and deputy CFOs, both career and political, jump-started the process. The group included Dennis Fischer, General Services Administration CFO; Education Department CFO Don Wurtz and his deputy, Mitch Laine; and Treasury CFO George Munoz and his deputy, Ed Verburg. They met to discuss opportunities to transform the passive CFO Council into a vehicle for more active cooperation among agencies dealing with common problems. They discussed their ideas with OMB officials and other members of the federal financial management community. Then, at an informal lunch with the CFOs and deputy CFOs of several departments held at the Education Department in early 1994, the group outlined a strategy to transform and re-energize the CFO Council. Their recommendations:

Council membership should be broadened to include both the CFOs (mostly political appointees) and career deputy CFOs, to insure cooperation and continuity of effort beyond the average two-year tenure of political appointees;

The council should elect other officers besides the chair-the OMB deputy director for management-mandated by the legislation. The new positions would be executive vice chair, vice chair for programs, vice chair for legislation, and secretary-treasurer. While the executive vice chair would always be a political appointee, the other positions could be either career or political officials.

The council should set the agenda for monthly meetings in coordination with OMB staff, rather than simply being informed of the agenda.

The CFOs agreed to propose the plan-some called it an insurrection-at the next CFO Council meeting in March 1994. Munoz alerted OMB's Alice Rivlin, who was at that time chairing the CFO Council. She immediately supported the plan and asked OMB staffers to assist in making the changes.

The publication in late March of a report to the National Performance Review on improving financial management provided further momentum for remaking the CFO Council. While most such reports were delivered with a "Dear Colleague" letter signed by the leader of the team that developed the report, copies of this one were delivered to all members of the CFO Council with a letter signed by Vice President Gore. It was the only instance in which the Vice President sent a letter transmitting an accompanying NPR report. Gore wrote, "I was very pleased to learn of your efforts currently under way to work together to strengthen the council's active role in helping to resolve long-standing financial issues facing the federal government."

In April, the council held a two-day retreat during which the initial slate of officers was elected. Since then, cooperation among council members, including providing resources to accomplish common projects, has accelerated. Examples of CFO Council efforts to help implement the Government Performance and Results Act (GPRA) and the Government Management Reform Act (GMRA) provide a flavor for what's happening.

Performance and Results

GPRA, like the CFO Act, passed with strong bipartisan support. It is the first legislatively mandated attempt to measure outputs and outcomes of federal programs. The traditional method of implementing this (or any) law would have been to tell an overworked staff member at OMB to develop draft implementation guidance, send it to agencies for comment, decide which comments, if any, to use, and then issue final guidance for further reinterpretation by each agency. Information about how to implement the law, and about its relation to other reform efforts, would have been rather general, if given at all.

The CFO Council tried a different approach. It established a GPRA Implementation Committee, chaired by Sallyanne Harper, acting CFO at the Environmental Protection Agency, to develop a handbook for CFOs and nonfinancial managers alike explaining the law and the steps needed for its implementation. Thirty-two committee members from fifteen agencies (including OMB and Treasury) collaborated in developing this highly readable 29-page guide, published in May 1995. The handbook increases the likelihood agencies will consistently implement the law and explains how the law relates to other management initiatives.

Management Reform

GMRA presented another challenge for the CFO Council. The law permits consolidation and streamlining of the many reports agencies are required to submit to Congress. The goal of consolidation is to pare these reports down to two-an Accountability Report and a Planning and Budget Submission-which can meet both agency and congressional needs.

The CFO Council formed a committee of fifteen people representing nine agencies, led by the Veterans Affairs Department's deputy CFO Frank Sullivan, to work on GMRA. The committee has been developing the reports in collaboration with OMB Controller Ed DeSeve and Treasury officials. Since the reform law passed two years ago, the group has identified six agencies developing pilot versions of the reports: Treasury, VA, the General Services Administration, NASA, the Nuclear Regulatory Commission and the Social Security Administration.

GMRA also includes a section on franchise funds, which are revolving funds used to support an administrative service that an agency offers to other agencies on a cost-reimbursable basis. The law provides for pilot franchise funds at six agencies to test the idea of expanding entrepreneurial efforts within government. As OMB's current deputy director for management, John Koskinen, recently commented, "not every agency has to use their own staff to do everything."

A subcommittee of the CFO Council, chaired by Clyde McShan, Commerce Department deputy CFO, collaborated with a National Performance Review planning committee and OMB staff member Mike Wenk to recommend which agencies should start pilot franchising projects. As of late March, OMB had accepted five of the six CFO Council recommendations and congressional approval of the choices, as required by the law, was imminent. The five agencies are the departments of Commerce, Interior, Treasury, and Veterans Affairs and the Environmental Protection Agency. The sixth CFO Council recommendation was still under review at OMB.

In addition to its work on GPRA and GMRA, the Council has been developing amendments to strengthen the 1982 Debt Collection Act with new debt collection tools; assisting an OMB-Treasury-General Accounting Office task force implementing governmentwide audits; expanding efforts to develop electronic commerce tools; developing core competencies and standards for CFO-type positions; and coordinating development of financial systems able to meet the federal accounting standards being completed this year.

OMB's Koskinen has strongly supported the CFO Council. From his experience in private industry, Koskinen values the ideas and enthusiasm of people who must deal with actual results daily. He says decisions, policies and follow-through improve when implementers are involved from the beginning. Koskinen has only modest resources at his disposal, but he has tremendous leveraging opportunities through the many interagency councils he chairs. That approach is clearly working with the CFO Council, which can serve as a model for other interagency efforts.

Teams like the CFO Council, with talented and dedicated players, do not require over-coaching. The council's success can be sustained as long as leaders who support its recommendations are in key positions at OMB and Treasury.

]]>