Government Wants Industry's Help Finding Solutions

Short on funds and pressed by new laws and regulations, civilian agencies are looking to the private sector both as a model for streamlined, performance-based operations and as the best place to conduct much of the government's business. Many agencies face stagnant or falling budgets and must cut staff. Congressional fervor for closing agencies, combined with an increasing interest in outsourcing, have produced an enthusiasm for contracting within the Democratic Clinton Administration that outshines the contracting zealotry of the Reagan-era Republicans.

In the 1980s, Reagan's privatizers had difficulty persuading agencies to even study the possibility of contracting out services. Federal unions fought privatization tooth and nail and private industry cursed service contracting rules as unfair. Today, President Clinton's Office of Management and Budget has rewritten the rules-contained in OMB Circular A-76-encouraging competition between agencies and private firms. The administration's partnership with federal unions has muted their protests and, in a nod to contractors, agency in-house bids now must include overhead costs.

New Rules Encourage Outsourcing

New laws and rules-especially the 1993 Government Performance and Results Act (GPRA) and the 1996 Information Technology Management Reform Act, as well as OMB's revised A-76 rules and Vice President Gore's National Performance Review-have forced agencies to take a new look at outsourcing. Managers have been directed to review their programs by first considering whether government should even be doing the work. This rethinking of government's role and renewed interest in contracting has helped keep the value of prime contracts with civilian agencies steady in the $60 billion range despite significant federal budget cuts in the last year. Contractors have reason to be optimistic. They should continue to ride the crest of the privatization wave even as government funding shrinks.

An Emphasis on Results

In addition to looking more favorably on outsourcing, civilian agencies are easing up on specifying how contracts are to be performed. As they set goals and measure their own performance under GPRA and the 1994 Federal Acquisition Streamlining Act (FASA), agencies care less about how contractors work and more about the quality of what they produce. FASA has added flexibility to the procurement process. Reinvention has permitted innovation, and the current effort to rewrite the Federal Acquisition Regulation will encourage a more open exchange of information between agencies and firms bidding on contracts.

"It is results we want, not unique federal processes," says Richard Hopf, deputy assistant secretary of Energy for procurement and acquisition reform. Energy has awarded about $27 billion in "performance-based contracts." "We tell the contractor the results we need and link fee to the achievement of those results," Hopf says. The goal is "to harness the best of contractor ideas and techniques for accomplishing a task by giving the contractor flexibility and wide latitude in how to accomplish the task." Energy and NASA, which together account for nearly half of civilian agency purchases, are leading the move away from traditional cost-plus awards toward giving contractors more responsibility for cost and technical and performance.

NASA has decided to get out of space shuttle management, for example, handing off day-to-day control to United Space Alliance, a joint venture between Rockwell International and Lockheed Martin. NASA expects to save $2.5 billion in the next four years by turning over shuttle operations to a prime contractor. After covering the costs of developing the first shuttle 25 years ago, NASA now has selected Lockheed Martin to pick up the tab for the design and development of the next generation of shuttles the agency plans to buy.

Energy, too, plans to cut the apron strings binding it to contractors. At Energy's Hanford, Wash., site, 56 gallons of radioactive waste must be cleaned from 177 underground tanks. Instead of setting up another government-owned, contractor-operated facility, DOE wants to privatize the cleanup by hiring a firm or consortium to finance, design, build and run pretreatment and treatment facilities to deliver treated waste. Energy will pay a per-unit fee for the immobilized waste. DOE's Richard Hopf expects the new performance-based cleanup contract to generate innovative approaches to problems that can be applied elsewhere within DOE. Contracts such as the Hanford cleanup award, Hopf believes, will create an advantage for firms looking to break into the international environmental market.

The recent trend toward mergers among federal contractors is getting a boost from agencies trying to expand their contractor base and increase competition. Both Energy and NASA, for example, encourage firms to partner, team and form consortia to bid on the ever larger and more demanding projects the two agencies want to privatize. DOE is aggressively encouraging partnering for the operation of large facilities, Hopf says, hoping to spread expertise through a broader base of contractors, thereby increasing competition in future procurements. Additionally, Energy has given major contractors permission to use different procurement strategies and techniques to increase subcontracting to small and disadvantaged businesses.

Slight Increases, More Decreases

Overall contracting outlays fell by just less than $1 billion at Energy last year-from $17.8 billion to $16.9 billion. That stumble follows a drop of $1.3 billion in 1994, the first reduction since 1986. Energy's 1997 budget request is for little more than the amount appropriated for 1996. Having fought off a congressional attempt to shut down her department in 1995, Energy Secretary Hazel O'Leary is now well along in her own strategic alignment initiative to cut $14.1 billion and 27 percent of the Energy Department workforce over five years.

Lockheed Martin contracts account for a quarter of the 1995 DOE market, up from 21 percent the previous year. The company also tightened its hold on the overall civilian agency market, where its contracts totaled $6.1 billion last year. Lockheed Martin increased its civilian market share from 9.7 percent to 10 percent, widening the gap between itself and second-place Westinghouse Electric from $2.2 billion in 1994 to $3.1 billion in 1995.

NASA saw a slight bump upward in purchasing last year-from $11.4 billion to $11.7 billion. The space agency, too, is a budget flat-liner for fiscal 1997, asking only to hold the line on its appropriation for 1996. NASA expects contract obligations will account for almost 90 percent of the total. Total NASA funding is slated to fall to just $11.6 billion by 2000 while the workforce is expected to shrink from 21,000 in 1997 to 17,500 in 2000. In addition to privatizing space shuttle operations, NASA has handed management of the space station program to prime contractor Boeing Defense and Space Group. The move has kept Boeing high on the list of civilian prime contractors-it jumped from 10th to 6th in 1994 and inched up to 4th in 1995.

Procurement spending by the third-highest-spending civilian agency, the General Services Administration, dipped slightly last year from $5.3 billion to $5.1 billion. Morse Diesel was GSA's top contractor in fiscal 1995, doing $280 million of building construction for the agency. AT&T fell from first to fourth among GSA contractors. The agency is preparing for the expiration of the Federal Telecommunications Service 2000 contracts with AT&T and Sprint in December 1998. Bid solicitations for the follow-on contracts were to be issued this July.

TRW vaulted from 19th to 8th among the top 100 civilian agency contractors primarily as the result of a $425 million, 10-year contract to build, operate and maintain the Treasury Department communications system. The system will include video teleconferencing, multimedia and e-mail to integrate tax and entitlement reporting, link law enforcement agencies, develop an international trade data system and promote electronic commerce.

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