Profit Motive
evel playing field. Increased competition. Fair.
To Mark Wagner, the words are hauntingly familiar. He recalls veterans of government contracting uttering them seven years ago, the last time the Office of Management and Budget revised the guidelines contained in its Circular A-76 that govern public-private job competitions. He's hearing them again today as new amendments will change the way contractors and government employees vie for thousands of federal jobs.
"When the 1996 revisions came out, older guys said, 'Don't touch it. A-76 is broken. It won't change,'" says Wagner, vice president of government relations at Johnson Controls, a Florida-based contractor. "The new guys were optimistic that the changes would be good for business; that they would level the playing field. Well, several years later, they are the ones who are skeptical. But there is hope out there."
As in 1996, the hope is that OMB's most recent changes to circular A-76-which were released May 29-will create a process that truly gives contractors a fair chance to compete against in-house agency teams. Under the old system, Wagner says, the cards were stacked against contractors. While they could-and did-win competitions, it was often an expensive and time-consuming ordeal. Officials from several large firms interviewed for this story, but who declined to speak for attribution, say they wouldn't even consider entering an A-76 competition under the current rules.
"We haven't gotten to that point yet, but we are very close," says Wagner. "We've waived on a couple of competitions because of our past experiences. There are some that you just don't want to touch."
Circular A-76 governs how agencies outsource work. Among other things, it sets strict rules for how companies and government employees compete for government jobs that have been deemed commercial in nature. Proponents view it as a way for government to get the best value for taxpayer dollars, regardless of whether agencies or vendors win the competitions. And while job competitions had supporters in previous administrations, President Bush has taken the theory to an entirely new level, ordering agencies to put half of the government's 850,000 commercial jobs up for competition.
The idea of opening jobs to competition is foreign to most civilian agencies. Historically, job competitions are most prevalent in the Defense Department, where military bases for years have been competing base operations and maintenance jobs. Administration officials claim that competitive sourcing can save the government billions of dollars, make agencies more efficient, and inspire federal employees to become more business-like in their approach to work. Opponents say it will do none of those things. Rather, they argue that it will kill morale throughout the government and won't generate the promised savings.
Nonetheless, OMB is pushing ahead with its ambitious plans. Among them is shortening the time frame for competitions. Currently, some contests take up to three years. The revisions tighten that to 12 months. The new A-76 also will hold in-house teams that win competitions to binding performance agreements.
"That is one of the positive things that is coming," says Stan Soloway, president of the Professional Services Council, an Arlington, Va.-based contractors association. "Right now, there are very few quality checks. The revisions will help level the playing field."
NO BID
Ultimately, success of the administration's plan to compete 425,000 federal jobs depends on contractors stepping forward and bidding for the work. Based on attitudes toward the current process, the Bush plan could be in trouble. Not only are industry officials balking at current competitions, but many say it will take years of monitoring progress under the revisions before they decide whether to re-enter the game.
Ken Johnson, president of U.S. operations at CACI, a Defense Department information technology contractor, says the process is broken beyond repair.
"It is certainly a process and program that has incredible potential to enhance the ability of the federal government to operate as efficiently as it can," says John Delane, president of Del-Jen Inc., a Southern California-based contractor. "But it is hamstrung by interference, mostly driven by the interests of labor unions that run counter to the program objectives."
Delane, whose company bids for military base operation and maintenance jobs, says that too often members of Congress or others unduly influence the outcome of competitions in favor of in-house teams. He's especially bitter about a project at Lackland Air Force Base in San Antonio. In August 2000, the five-year $352 million contract was awarded to Lackland 21st Century Services Consolidated, a joint venture of Computer Sciences Corp., Del-Jen and Tecom Inc. The government team filed a protest and won. The firms then appealed to the General Accounting Office, which recommended that the Air Force abide by its original decision. Angered by the flip-flop, the Texas congressional delegation requested a Pentagon investigation. The Defense Department inspector general found that the process was rife with errors. Ultimately, the Air Force canceled the competition. Delane and other contractors believe that members of Congress strong-armed the Air Force to drop the competition and return the jobs to base employees.
"When industry invests millions to save the government money and, at the end of the day, the process is thwarted by individual interests . . . it's unconscionable," Delane says. "Members [of Congress] should be ashamed of themselves."
Further, Delane says some competitions, from the outset, favor the in-house team. While he did not offer specifics, he says contractors generally know which ones to avoid. "Every base, every command, every agency has a different DNA," he says. "You have to look at their track record. We in industry become students of what agencies have done [and] if their competitions have been fair. There are a variety [of agencies] that we just walk past because we know their DNA and that it's below our standards."
Even if contractors feel they have a fair shot at winning a competition, they often conclude the price is simply too high. Competitions can take so long that they tie up valuable capital and human resources, says Wagner.
THE DIRECT APPROACH
Given the concerns with job competitions, many contractors-especially in the information technology world-are more comfortable competing against each other for outsourcing work that agencies award outside the A-76 process.
The federal government will spend more than $45 billion this fiscal year on IT products and services, according to market research firm INPUT. Outsourcing efforts-defined by the researchers as arrangements in which a company manages or performs an IT operation on behalf of an agency-will account for nearly 18 percent of that spending.
The bigger the federal contractor, the bigger the share of the outsourcing pie they want to capture. The top IT systems integrators, such as Lockheed Martin, Northrop Grumman and Computer Sciences Corp., each with annual revenue in the billions, can't afford to spend their time and money bidding on low-value outsourcing efforts, such as those in which an agency turns over a small business function, rather than an entire operation.
Instead, the big contractors look for high-priced deals with potential for long-term revenue generation. Computer Sciences scored such a deal in 2001 with the National Security Agency's $2 billion outsourcing of all its non-mission IT functions, including desktop computer and network services. The contract, known as Groundbreaker, is scheduled to last 10 years.
"Size is important," says Steve Rohleder, head of the global government practice at Accenture, one of the biggest IT integrators. Technology support and outsourcing represents more than half the company's federal business, he says, noting that Accenture has seen "tremendous growth" from implementing and then running technology systems for agencies. The company looks for contacts not just to provide particular kinds of technology, but to run the businesses associated with them. For instance, in January Accenture won a $214 million contract to provide human resources administration for the Transportation Security Administration that includes responsibility for handling employee record keeping and paperwork processing.
Companies not in the highest ranks of the IT contracting world target smaller outsourcing opportunities. CACI's Johnson says bidding on massive contracts "requires a size or . . . a financial girth that's beyond" the capacity of his company. Johnson says that with annual revenues of less than $1 billion, CACI is much smaller than the contracting giants. CACI has targeted contracts such as a network services operation it runs for the Federal Aviation Administration. That contract is worth about $20 million.
Johnson says the government will take seriously "only a select few" companies that bid on big contracts, such as the Navy-Marine Corps Intranet, a program to build a new technology infrastructure for the two military services. Electronic Data Systems Corp. won that deal, and as part of the terms, the company had to buy the old technology assets it was replacing from the military. Taking on a huge liability like that is outside the reach of a company like CACI.
Because of the difficulty in competing for huge outsourcing deals, smaller firms often focus on subcontracting through the large integrators.
Pete Scalone, who heads the federal division of Computer Associates, a software maker that has done business with the government for many years, says that under such arrangements, the company "loses some level of control." Computer Associates would prefer to sell licenses for its software directly to agencies. But in most cases, agencies follow the prime contractor's suggestion, which is usually to let the company buy the licenses.
In such cases, Scalone argues, an agency can be "held hostage." He advises agencies to write contracts that let them retain ownership of their licenses if an outsourcing arrangement is terminated, particularly if they're unable to run a key operation without the software.
Despite such concerns, Computer Associates is doing more and more business with the integrators. "As outsourcing increases, we are increasing the number of times we try to partner," Scalone says.
SCALE AND SCOPE
Accenture's Rohleder says the most successful outsourcing companies figure out how best to marry technology with concepts about how to better run an organization. But whether any firm will accomplish that goal in the federal arena remains to be seen, largely because the scale of the jobs some companies have taken on is so huge that it will take years to determine how successful they've been.
Consider one of the biggest IT outsourcing deals of the past year, the Transportation Security Administration's $1 billion contract with Unisys Corp. to build and manage the agency's technology infrastructure. The contract is performance-based, so Unisys is rewarded for its ability to meet specific deadlines, which have included the deployment of basic technology equipment to all U.S. airports by certain deadlines. Unisys' progress can be judged at the micro-level on how well it meets those benchmarks. But it could take years, after the TSA network is fully deployed and has been working for some time, to truly judge whether the performance-based approach was the best to take.
Large-scale outsourcing efforts in the private sector have produced mixed results, according to new research. Companies usually choose to outsource because they anticipate it will bring significant savings. But in March, research and consulting firm Gartner found that senior private sector executives reported that only half of IT outsourcing projects met their expectations of reducing operating costs.
An Accenture study released in May found that governments generally choose outsourcing for two reasons: to increase the efficiency of an operation and to "transform" their business. The Accenture researchers studied several national governments, including the United States, and found that those choosing the efficiency track outsource specific tasks in order to trim costs and redirect funds to other mission-focused areas of the agency. That track follows the more traditional concept of outsourcing that the Gartner study found had disappointed many corporate executives.
The transformational path, however, involves transferring an entire business process to a contractor. And that's where the biggest opportunities for vendors lie. TSA's contract with Unisys falls into this category. The deal offers incentives for Unisys to come up with ways to improve how TSA does business. The company is expected to recommend improvements and figure out how to achieve them.
INPUT's outsourcing findings underscored what companies such as Unisys know very well: The government is growing increasingly dependent on the private sector for technology support and expertise. Even though the government hired thousands more IT workers in 2002 than the previous year, the administration is urging agencies to abandon functions that aren't mission-focused, and many of those fall into the IT domain.
As that process plays out, government will become less reliant on its own IT workforce, says Payton Smith, an INPUT analyst. In addition, as OMB pushes agencies to deploy technology systems that encompass an entire enterprise, one of the logical ways to do it will be through outsourcing, he says.