The Outsourcing Trap

Contracting craze exposes government inability to keep skills in-house.

Doing more with less seems to be an infinitely common motto. No one has taken this to heart more than the federal sector. Since 1960, the United States' gross domestic product has more than tripled in constant dollars, and federal spending has nearly kept pace, rising 313 percent. But the federal workforce has increased only 3.5 percent. The solution for the Air Force, and to a larger extent the entire federal government, has been to hire contractors to perform duties that were previously filled by military personnel or civil service employees. Contractors provide expertise and continuity in many areas, but the practice of outsourcing core duties is, at best, undermining the federal workforce and, at worst, harming national security.

In light of outsourcing trends worldwide, contracting out is appropriate only for a function that is not core to a business. According to the OMB Circular A-76, an activity is inherently governmental if it "is so intimately related to the public interest as to mandate performance by government personnel." Now, the Transportation Security Administration is outsourcing security workers, the Homeland Security Department is turning over the sovereign function of border security to private industry, and the Pentagon is contracting out thousands of intelligence jobs. How much more inherently governmental can these functions get? They define the federal government's role.

The two legitimate drivers of outsourcing are cost savings and hiring flexibility. Public-private competitions show that even though a contractor might be paid more, the cost to government is less when training and benefits are factored in. Second, it's often difficult to hire quickly in government. The new National Security Personnel System will address this problem, but hiring a support contractor is usually easiest and fastest.

A third driver is the so-called lack of necessary skills. Nearly all contractors are former federal employees, whether military or civilian. The federal workforce is one of the most educated in the world. Often, the Air Force trains and equips competent people and then watches as they get hired away by a defense contractor to do a similar job for the government, typically at a higher salary.

Losing Young Talent

Statistics about the aging federal workforce abound. There is a push to get young blood into the system. Many bright, well-educated college graduates have been added to the Air Force workforce. The problem is, and will continue to be, that many of them leave.

A junior hire in the Air Force's trainee program for financial management signs on as a GS-7. Each year with the completion of a well-defined set of requirements, a trainee is promoted to GS-9 and GS-11 until completing the program at the end of year three as a GS-12. Promotions from GS-07 to GS-12 bring roughly a 20 percent increase in salary each year. But an employee might spend the rest of his career trying to attain similar salary increases to those in the first three years.

When I was hired, I received a $7,000 recruitment bonus. During my first two years of government service, I was reimbursed more than $30,000 for graduate classes. In addition, government Thrift Savings Plan contributions are vested after three years. Also, after three years of service, my leave time will accumulate to 20 days a year. With the "high three" Federal Employees Retirement System pension benefit, young employees who are thinking about leaving can stay for three years after obtaining GS-12 status to optimize any pension payout.

With the government penchant for contractors and a front-loaded benefits system, agencies are grooming young workers to go find jobs with contractors after four to six years of federal service. A six-year Air Force employee now has a $70,000 salary, an MBA, 20 days off, a vested TSP and an optimized FERS benefit. After six years, an employee now has the leverage to go to a contractor and say, "This is what I'm making. If you want my MBA education, security clearance and experienced technical knowledge of the Air Force, then here's what you have to beat."

The government can actually offer a better deal for young workers than industry does. Sure, the potential to earn more in industry is better, but how many people at your five-year college reunion were earning $70,000 on a 40-hour week with a paid-for MBA degree and four weeks of vacation, not to mention the intangible coolness that comes with contributing to the defense of your country? But what happens after five years? With defense contractors offering more compensation for similar roles, will these benefits be enough to keep young workers in federal service beyond those first few years? For some they will, but for many they won't.

Comparing Benefits

When the Air Force outsources, it doesn't always contract out a function completely. Some tasks, such as information technology support, are virtually 100 percent contractor-operated. The cost and flexibility makes sense. IT support is not a core competency for the Air Force. The problem is when the service partially outsources certain functions. When contractors work alongside uniformed personnel in intelligence positions or alongside civilians in program management, employees start to compare. If a contractor can have more upward mobility and earn 20 percent more to do the same type of program management tasks as a government employee, what will stop a federal employee from converting?

Government cannot have it both ways. It must decide which functions are at its core and keep those positions completely in-house. Other functions that support the main mission can be, and probably should be, completely outsourced. The Defense Department is in a different situation than many civilian agencies because it has to worry about national security. The more contractors it deals with, the more challenging security becomes. It's best to err on the side of a talented, well-trained, in-house workforce.

The Air Force, and other agencies, could refine HR policies to shift some of the front-end benefits to future years. The government still could offer competitive benefits early in a career track and save some incentives to keep workers around for 10 years or more. A more appropriate use of contractors and proper incentives for those already in federal service can ensure a lower cost, higher productivity workforce-a win-win for everyone.