Reinvention: the Next Generation

Two agencies learn the limits of reinvention

espite the promising prospects of the Patent and Trademark Office and U.S. Investigations Services Inc., many still see them as examples of the dark side of reinvention. But to others in government, these pathfinders have dramatically expanded the universe of reinvention possibilities, and there are those who desperately want to follow in their footsteps. These revolutionaries figure that if a public organization wants to think and act like a private business, it ought to just go out and become one. Unfortunately, that's not as simple as it sounds.

Take the example of Chuck Sommer, head of the Army Management Engineering College (AMEC). Sommer worked for years to try to reinvent his organization, ultimately concluding the only path to true reform was privatization. But he learned the hard way that others in the Army did not share his views.

Embracing Quality

Originally a small (150-employee) unit located in Rock Island, Ill., AMEC did just what its name implies: taught the Army's industrial engineers how to do time and motion studies and develop labor standards. Then the quality movement arrived, and AMEC's reinvention trek began.

AMEC officials embraced Total Quality Management principles with almost religious fervor. By 1989, the unit had established a stellar reputation for expertise in the area of quality management, practicing TQM in its own ranks as well as preaching it to dozens of external customers. None too soon, either-Defense Department training budgets began to decline precipitously as the department downsized, and AMEC found that it had to rely more and more on its customers (that is, other organizations within DoD and, increasingly, among other federal agencies) as a source of funding.

Abandoning a traditional academic structure with deans and department heads, the college's leaders organized the faculty into self-directed teams reporting to an executive board. In addition to their regular teaching and research responsibilities, faculty members were encouraged to be more entrepreneurial, and they were schooled in aggressive (at least for government) sales techniques to better market AMEC's various training and consulting services.

Today AMEC barely resembles the staid operation of the early 1980s. A vibrant, customer-focused organization that offers state-of-the-art management training and consulting to a variety of government clients in and outside DoD, it is now almost completely self-supporting, with more than 70 percent of its operating expenses covered by revenues.

Catch-22

AMEC, however, may have become a victim of its own success. As the college's budget cuts were offset by sales revenues, AMEC began to realize it really didn't need the Army's money-it could become completely self-supporting. All it needed was some relief from rules and regulations. So in 1993, with the National Performance Review just getting under way, AMEC's then-President, Col. Jack Prior, convinced his superiors in the Army Materiel Command, AMEC's parent organization, to designate the college one of the government's first reinvention labs.

Unfortunately, lab status doesn't mean relief from Catch-22 situations. The ink was barely dry on AMEC's lab designation when Prior and company asked for waivers from 11 different Army and DoD regulations. One of the most critical had to do with overhead charges: Army financial management rules precluded an organization like AMEC from adding an overhead charge to the rates it bills its customers. Without authority to do so, the college would forever be dependent upon some Army funding.

The organization asked for an opinion from the Army Materiel Command's general counsel, who advised them that recouping overhead costs through fees would constitute an illegal augmentation of appropriated funds. Even though the Army was in the process of closing down AMEC, zeroing out its appropriations, the general counsel argued that as long as it remained on the Army's budget books, it was barred from paying its own way. The opinion was later reversed by the Army's top lawyers, but not before the college had to lay off 22 people in September 1993 for lack of funds.

AMEC began to search for more lasting solutions, and it turned to something called the Defense Business Operations Fund. DBOF, described by one wag as "the mother of all revolving funds," was created by DoD in 1991 as a market-like mechanism designed to bring competitive discipline to the exchange of goods and services among the military departments. Under DBOF, maintenance facilities were required to charge operating commands the full cost for their services, including overhead expenses.

This sounded like just the ticket for AMEC, and they applied for admission. "We were the first ones ever to volunteer for DBOF," says Sommer. "Everybody else was nervous about the competitive pressures. We wanted them." Unfortunately, they were faced with yet another potential snag-the DBOF governing board approved AMEC's application, but with an important condition: The college would have to find a home with an existing fund activity. No problem; the Army Materiel Command, AMEC's parent organization, was a part of DBOF, and the college could just stay where it was.

But suddenly, the command denied paternity, deciding that it was no longer in the training business: "Not one of our core functions," AMEC officials were told. According to Sommer, this was not a matter of principle or money. "We would have been able to pay our own way," he says. "But we would have had to count against Materiel Command's personnel ceiling." In other words, there were not enough jobs to go around under OMB and congressionally imposed personnel caps. The DBOF door slammed shut.

Be All That You Can Be

AMEC then tried moving in a different direction. A little more than a year ago, Army Secretary Togo West authorized a feasibility study of AMEC's privatization as an employee-owned company. The study confirmed what the college's band of entrepreneurs knew all along: AMEC could indeed survive as a self-supporting enterprise. Sommer began to make plans for conversion to an ESOP.

Suddenly, though, the Army Materiel Command had a Solomon-like change of heart, deciding that various parts of the college should remain in-house. So it kept 19 employees associated with the Defense Acquisition University and another 22 who were part of the Army's School of Engineering and Logistics. The feasibility study had to be repeated, and although it reaffirmed the viability of an AMEC Inc., the college's reinvention trek had taken its toll. From 126 employees in 1994, the college was now down to just 27 valiant survivors.

Nevertheless, "we thought that we were finally on our way" to privatization, says Sommer. But once more the Army seemed to hesitate, showing concern about an estimated three-year, $1 million price tag for AMEC's privatization (which included funding for an oversight and conversion staff, as well as a "trustee contract" similar to the one OPM awarded its former investigators). Sarah Lister, the Army's assistant secretary for manpower and reserve affairs, sent a formal request to the Army's Training and Doctrine Command asking it to become AMEC's foster parent.

At the end of February, the Army made it official: AMEC would join TRADOC. The organization will be funded from direct appropriations, just as it was prior to the reinvention journey. Sommer wants no part of that arrangement, and has decided to leave the agency.

In the end, reinvention, entrepreneurialism, and the dream of becoming wholly customer-funded were simply not enough to propel AMEC beyond the gravitational force of the bureaucratic system.

The Outer Limits

For other agencies, though, the dream of moving beyond federal control is still alive.

Such is the case with the Alaska Native Medical Center (ANMC), part of the Health and Human Services Department's Indian Health Service. The center provides primary medical care to Native Americans in the Anchorage area, as well as secondary health care throughout the state. As a reinvention lab, it too has pushed the edge of the NPR's envelope in an effort to better serve its patients-only to conclude that even the edge was not far enough. As a consequence, ANMC is now close to realizing its own unique version of emancipation: becoming a not-for-profit hospital independent of the federal government.

As with so many organizations that have emerged as NPR exemplars, ANMC embraced quality management principles in the early 1980s as the road map for its transformation ("reinvention" was not yet a term of art). It wasn't long before the medical center-and its director, Dr. Richard Mandsager-had established a reputation for innovation, and when the NPR came along, ANMC was invited to become a reinvention lab. The center's staff saw this as opportunity to extend and expand care-giving improvements begun under TQM. They were especially excited about the promise of regulatory waivers. Indeed, ANMC officials describe its regulatory environment at the time as "oppressive," with the center subjected to rules issued by the Indian Health Service, the Public Health Service, and HHS.

So with great anticipation, the center quickly submitted its first package of 26 waiver requests-many seeking relief from procurement and personnel constraints imposed by its higher headquarters. For example, ANMC even needed approval from higher-ups to offer recruiting and relocation bonuses for moves to Alaska.

The HHS waiver process was arcane and convoluted (some would argue that it was deliberately created to be that way), with some requests requiring the approval of several different staff offices at different levels of the department. The center's waiver requests did not exactly receive a warm reception.

"It was us against the world," says Mandsager. "The senior levels realized that they should get on board-it was the politically correct thing to do-but the 'push back' came from the procurement and personnel offices at Indian Health Service headquarters." ANMC's waiver prospects dimmed.

However, to the center's surprise, help came from an unexpected source: HHS headquarters, in the form of the lab's very own reinvention "champion"-a bureaucrat named Bill Forbush. A career senior executive, Forbush had been given responsibility for overseeing the activities of the Public Health Service's various reinvention labs.

He was an unlikely hero. Mandsager, who knew Forbush before he became involved in reinvention, says he was "the consummate administrative bureaucrat" who became "an amazing, relentless driver" of change. Forbush would not take "no" for an answer, tenaciously pressuring reluctant staff offices to grant waivers. Quite a metamorphosis for someone who had thrived in a traditional, top-down staff role, but according to Mandsager, "If it hadn't been for him, not much would have happened." Indeed, if you look hard enough, you may find a Forbush behind every successful lab.

Escape Velocity

To everyone's delight, most of the center's waiver requests were eventually approved (typically, those that weren't-like discretion to reprogram funds among appropriations accounts-were beyond the department's authority). However, ANMC's euphoria was temporary. The Public Health Service was abolished in a massive HHS reorganization, and Forbush retired.

Without its champion, the waiver process suddenly clogged up again. And what at first had seemed like major administrative breakthroughs-permission to survey patients to see whether they were satisfied with services, for instance-just served to whet the center's appetite for more. "Now the stuff we asked for doesn't seem very significant," says Mandsager. "We thought that it was revolutionary. Now we ask 'Why wasn't our vision bigger?' "

Not one to dwell on such rhetorical questions, Mandsager has found his "bigger vision" with the prospect of leaving the federal government's orbit outright. He and his staff have turned their energies to achieving true independence as a not-for-profit tribal operation.

Under a plan developed over the last two years by ANMC, "ownership" of the center, with its 750 employees and brand new $170 million facility, would be transferred from HHS to the Alaska Tribal Health Compact, a consortium of 206 Eskimo and other Native American tribes. That consortium has been granted special status under the 1974 Indian Self-Determination and Education Act (itself a unique experiment in devolution), which treats tribes just like state governments, especially with regard to federal financial support. Tribes covered by the act can receive block grants, along with considerable administrative discretion.

If all goes well, the center should leave the federal constellation sometime in the next few years. Understandably, there is some apprehension. According to Mandsager, ANMC's previous reform efforts pale in comparison to moving out of the federal government altogether.

However, the advantages are already apparent. Center staff now spend most of their time working with the Native American tribes in Alaska-rather than the bureaucratic ones in Washington-and they love it. They also love the impending freedom of having some say in deciding which of the old administrative rules they will keep or discard. However, Mandsager doesn't belittle the reinvention experience. "It was significant," he says, "in terms of convincing people that change was possible, that there was an alternative."