utting your money on technology is a sure bet for the foreseeable future in government contracting. Government managers are turning to technology as never before to accomplish their core missions as staffs and budgets dwindle. Agencies are under orders to incorporate technology whenever possible as they redesign work processes and work flows. Technology also is being increasingly applied to administrative functions such as training and personnel record keeping.
"The mainstream of government will continue to move in the direction of better use of information technology to deal with the everyday business process and interactions with customers," predicts Steven Kelman, administrator of the Office of Federal Procurement Policy at the Office of Management and Budget.
Information technology already has insinuated itself into almost every corner of government, according to the General Accounting Office. "Information systems are now integral to nearly every aspect of over $1.5 trillion in annual federal government operations and spending-from national defense and air traffic control to revenue col-
lection and benefits payments," according to the "Information Management and Technology" volume in GAO's 1997 "High-Risk Series." Agencies have obligated over $145 billion in the last six years to build up and maintain IT infrastructure, according to the GAO report.
For evidence of government's growing reliance on technology, one need look no further than Vice President Al Gore's Access America report, issued Feb. 11. In it, interagency teams have spun a challenging plan to meet 18 technology-based service goals within three years. The program includes making all federal payments using electronic funds transfer by 1999, easing electronic tax filing and allowing state and local governments, businesses and citizens to do more business with Uncle Sam online.
"The idea of reengineering through technology is critical," Gore said in introducing the proposals. "Information technology was and is the great enabler for reinvention. It allows us to rethink, in fundamental ways, how people work and how we serve customers."
The report says citizens should be able to walk into a government office or tap into a government World Wide Web site and request a replacement Social Security card, apply for a passport, get a fishing license and enroll in the Department of Veterans Affairs' health care system-all at the same time. For people in rural locations, Access America calls for a 21st century "bookmobile" to travel around the country offering government services on computers connected to the Internet via cellular phone links. The report also says the government will expand its use of kiosks in libraries and post offices.
The Clinton administration's fiscal 1998 budget trumpets IT as one of seven tools the administration plans to employ more comprehensively to improve agency performance and cut costs. Today's challenge isn't simply buying technology, but managing it to ensure maximum return on investment, according to President Clinton's budget request. The administration wants agencies to use the freedom granted by the 1996 Information Technology Management Reform Act (now dubbed the Clinger-Cohen Act, after its congressional sponsors) to emulate the successful technology practices of private firms. That means:
- Reengineering before automating.
- Buying systems in phases.
- Avoiding custom-designed components by buying technology off the shelf.
- Consolidating and outsourcing technology functions not directly related to core mission.
- Monitoring the progress of technology acquisitions with performance-based management systems.
- Integrating information across agencies.
Back Office to Front Office
Kelman says government's technology buildup is on display in "everything from back-office accounting and human resources functions to the way the IRS interacts with people who call on the phone to the way the weather service predicts the weather."
In the realm of customer interaction, for example, GAO reported in June that 42 agencies maintain approximately 4,300 World Wide Web sites and 215 electronic bulletin boards to serve internal and external customers. In addition, the 42 organizations provide Web access to almost a third of their staffers and e-mail access to about half. Some organizations are using the Web to put the combined wisdom of their experts online. For example, the Occupational Safety and Health Administration has created an online expert system about dangerous and confined work spaces. The system takes users through a series of questions and, using information gathered from OSHA experts, determines whether a space is covered by OSHA regulations covering confined spaces.
To see how technology is taking over back-office functions, turn to the Defense Department, where IT is proving just the ticket for improving the cumbersome travel administration process. Using electronic data interchange, travelers will use their personal computers to enter their travel plans into a common user interface to which travel agents will have access. The paperless system will allow supervisors to approve travel plans and travelers to file for reimbursement online.
The Defense Logistics Agency is using technology to speed Defense agencies' purchasing by creating a virtual mall linking DLA's various electronic catalogues. At the Environmental Protection Agency, employees are using a workflow application to prepare, route, track and submit procurement and leave requests. Another program goes straight to the heart of EPA's regulatory raison d'etre by helping employees produce and track reports used in developing regulations.
The Army, too, is taking technology to the heart of its mission with an experimental force of digitized soldiers. Wrapped in fighting harnesses that include a PC, radio, global positioning system and a helmet with heads-up display, Army grunts will take technology into battle.
"We are building a soldier as a platform with the war fighting capabilities we want," Brig. Gen. Henry T. Glisson, commander of the Army Soldier Systems Command, told National Defense magazine last summer. The Army field-tested its $700 million digitized battlefield during exercises in March, but results proved disappointing. Far too many soldiers were "killed" by friendly fire. Nevertheless, the digitization program lives on to fight again another day, fueled by recommendations contained in DoD's Quadrennial Defense Review in May.
Getting Out of Business Lines
As surely as technology is creeping into every aspect of agency operations, so will ever more government organizations decide to streamline and restructure out of some lines of business. More than eight in 10 of the fastest growing U.S. firms already are outsourcing some functions, the Coopers & Lybrand Trendsetter Barometer, a quarterly survey of CEOs of the fastest growing U.S. businesses, reported in February. More than half are saving money as a result. Payroll, tax compliance, internal auditing and accounting were most commonly foisted off, and it's a safe bet similar functions in government soon will be put on the block.
"My prediction would be that over the next five years we're going to see more activities under contract," Kelman says. The most obvious candidates for outsourcing are functions in which there is plenty of private sector competition, such as payroll, financial management and data center management. Some predict that within the next five years at least one federal agency will outsource its entire IT function, as well.
But outsourcing opportunities aren't limited to administration or IT. Defense aircraft maintenance is a likely target, for example, provided lawmakers change the law requiring 60 percent of Defense depot maintenance work to be done at government installations.
At the National Oceanic and Atmospheric Administration, Congress, the Office of Management and Budget, GAO and others are pressing for replacement of the agency's aging fleet with a rent-a-ship program. NOAA's own inspector general recommended the agency stop investing in agency-designed, -owned and -operated vessels and contract for ship services from private firms, academia and other government agencies whose ships are cheaper to operate and more modern.
At the Energy Department, a report released for comment in January, "Harnessing the Market: The Opportunities and Challenges of Privatization," lists more than 200 operations Energy could hand over to the private sector through divestiture of functions, contracting out and asset transfers.
The operations government decides to keep can expect to be more closely scrubbed by budget reviewers in coming years. Big-ticket asset purchases-be they IT, real estate, dams or buildings-will come under special scrutiny. Clinton's fiscal 1998 budget request, which seeks $60 billion in capital asset outlays, stresses the need to improve planning, cost-benefit analysis, financing and risk management of big-ticket items. The administration has released a "Capital Planning Guide" that addresses the requirements of the 1993 Government Performance and Results Act, the 1994 Federal Acquisition Streamlining Act and the Clinger-Cohen reforms.
The new emphasis on capital planning means several things for vendors, according to Kelman. First, companies can expect more emphasis on businesses cases for big investments. That means vendors should be helping their customers make those cases. Administration officials also are pushing agencies to seek full, up-front funding for capital assets. For vendors that will mean cash flows will be assured, financing will be more stable, and fixed-price contracts will become more common, even on large, long-term programs.
Kelman also predicts a gradual move toward shared savings or gain-sharing contracts for big system buys. California's Franchise Tax Board pioneered this approach. The board devised a method of procuring large, complex IT systems in which the vendor puts some or all its fee at risk if it fails to meet performance targets. In exchange for taking on the risk, the contractor gets a significant share in savings generated by performance above the targets.
The IRS is taking a shared savings approach with its Prime Systems Integration Services contract, the latest effort to complete the beleaguered and costly tax system modernization. The final draft of the request for proposals is due Oct. 1. IRS hopes to partner with a prime contractor to jointly create a detailed systems development plan. In exchange for making the front-end capital investment in the overall system, the prime vendor would receive a capped amount of additional revenues generated as a measurable outcome of the system and, for non-revenue generating systems, fees based on measurable outcomes. IRS is looking for a vendor with at least $200 million in working capital and significant, verifiable experience in software development, managing large programs and systems integration.
Another example of shared savings in federal contracting is the Energy Department's Financing Renewable Energy and Efficiency (FREE) contracts. Under these contracts, energy service firms will pay for and install energy-saving technologies and equipment in federal buildings at no cost to the government. In exchange, the companies will get, for a set period, approximately half the savings realized when electricity bills decrease. The government spends $4 billion a year on electricity, according to Energy Secretary Federico Pena, and DOE estimates the FREE contracts will save $1 billion per year. The department has awarded contracts for federal facilities in eight states in the first stage. The agreements have the added advantage of reducing the energy procurement burden on federal facilities, which now can place orders under DOE-negotiated multiple-award contracts.
Clearing Out Leftovers
Once agencies become adept at squeezing more value out of big assets at less cost, smaller IT assets are likely to be the next targets, says Christopher Hoenig, associate director of information resources management policy and issues in GAO's Accounting and Information Management Division.
Private companies have recently discovered they are hemorrhaging cash on unneeded IT equipment to the tune of as much as $66 billion this year-almost 10 percent of total annual IT purchases, according to a study by Sentry Technology Group cited in Information Week in June. As companies begin to get a grip on poor IT asset management, government won't be far behind, Hoenig predicts. There are "gobs of leftover equipment" gathering dust in agencies, he says.
For example, in 1995 GAO found the Agriculture Department wasted as much as $11,000 a month paying to lease telecommunications equipment, including hundreds of rotary telephones and modems agency employees did not use. Getting a handle on IT equipment will boost asset-management programs and could lead to more centralized IT purchasing. Agencies might even stop buying altogether and rent instead. GSA is preparing a new multiple-award task-order contract to begin this year allowing agencies to pay monthly for technology and service without taking ownership of desktop computing tools.
Premium on Performance
The growing importance of asset management shows that slowly but surely government is becoming more oriented toward performance, says OFPP's Kelman. The premium on performance is an outgrowth of GPRA, as well as acquisition reforms. As government acquisition policy czar, Kelman hopes to turn the purchasing system into a servant of the results-oriented approach.
Streamlining purchasing requirements means government will be better able to keep up with technology cycles and intellectual and physical resources will be freed to weigh which investments make the most sense in terms of agencies' performance goals. Quicker, easier acquisitions are making agencies more willing to imitate commercial purchasers by buying big systems in small, useable increments rather than in huge, expensive, multi-year programs.
The focus on getting results also means government buyers are taking a closer look at vendors' past performance to make sure they're up to new tasks. Agencies are punishing firms that fail to measure up: Witness the Air Force's recent decision to drop Zenith Data Systems from its Desktop V contract for falling behind on deliveries and warranty performance on IT equipment.
Performance-based contracts, which hold vendors tightly to performance targets while easing scrutiny of how vendors accomplish the work, are proliferating. Last year, NASA made a six-year, $7 billion deal with United Space Alliance (USA)-a joint venture of Lockheed Martin Space Operations and Rockwell International (now Boeing North America)-to operate the space shuttle program. The performance-based contract allows USA to keep 35 percent of any cost savings it produces, while 65 percent goes back to NASA. The agency grades USA's performance semiannually and those grades determine the amount of profit to be awarded to the joint venture. The contract also permits NASA to withhold fees for poor performance. A stuck hatch that prevented two scheduled spacewalks on the shuttle Columbia in November cost USA $1 million in fees, for example. The contractor has disputed the charge, but NASA is withholding another $2 million in USA payments pending investigation of a faulty fuel cell that cut short a 16-day Columbia mission in early April.
Downslide Leveling Off
Budget balancing fervor makes it unlikely that acquisition reforms will bring a sudden upsurge in contracting outlays, but the contracting downslide that began in the early 1990s appears to have leveled off. Overall government spending on contracts worth $25,000 or more has settled in the $178 billion to $180 billion range. The fiscal 1996 total of $178 billion is almost unchanged from the fiscal 1995 mark. The year's top 10 firms pulled down $54.3 billion (30 percent of total spending on prime contracts), just a hair more than the previous year.
Gone from the top 10 ranks are Loral, which was swallowed up for $9.1 billion in 1996 by monster vendor Lockheed Martin, and Tenneco, which vaulted into the top 10 in 1995, but slid back to 41st after selling off its Newport News shipbuilding division. Departure of those two firms from the top of the roster left room for United Technologies Corp., which climbed from 12th in 1995 to the eighth spot in 1996, and the University of California, up to ninth from No. 11 in 1995. United Technologies rose on the strength of its aircraft engine and helicopter business with the Pentagon. The University of California's numbers mushroomed on the nuclear work its Lawrence Livermore and Los Alamos laboratories are doing for the Energy Department. Each lab took in about $1 billion in 1996 to come up with methods to honor America's test-ban treaty obligations by testing the nation's nuclear stockpile without actually blowing up anything.
The name "McDonnell Douglas" isn't long for the top vendors list now that the defense giant is slated to merge with Boeing, which also bought Rockwell International's defense operations. Major military players continue merging as the number of big defense contracts dwindles. For example, fifth-ranked Raytheon has announced plans to gobble the defense sides of Hughes Electronics Corp. and Texas Instruments. And in July, Lockheed Martin said it would acquire sixth-ranked Northrop Grumman.
The ranks of the big defense firms have thinned by more than half since the 1990s began. But the Pentagon is still the government's biggest buyer. Of the $178 billion government spent on products and services last fiscal year, $122 billion or 68 percent, went for Defense purchases.
Civilian agencies spent $56.5 billion, down nearly 7 percent from $60.6 billion in 1995. As in 1995, combined spending of $27.5 billion by the Energy Department and NASA was nearly half the civilian total in 1996. Among civilian contractors, the Bechtel Group made the biggest move, springing from No. 16 in 1995 to No. 5 in 1996 almost solely because of $1.3 billion in Energy Department spending. Bechtel won one of Energy's largest 1996 contracts, a deal to manage and operate the Nevada Test Site. In addition, as a subcontractor to No. 2 Westinghouse, Bechtel picked up part of a $6 billion deal for stabilizing nuclear materials at Energy's Savannah River, S.C., site.