Cover Your Assets

Last year, a federal agency asked the Office of Management and Budget to approve funding for a computer system upgrade. Why? So the system would be state of the art, the agency said. Unsatisfied with that answer, OMB resource managers pressed the agency to explain why it needed a state of the art system. "We're behind and we need to upgrade," the agency responded.

Then came the $64,000 question. Though the 1993 Government Performance and Results Act had not been fully implemented yet, "the question was: 'What are you not accomplishing against your strategic goals that we need to spend this money?' " said David Muzio, deputy associate administrator for procurement at OMB's Office of Federal Procurement Policy. "No answer was provided so no money was budgeted," he told project managers attending a March 21 forum in Washington.

That's how it's going to be from now on: If you hope to buy new assets or complete purchases already under way you'd better be prepared to make a business case. There are no more Mr. Nice Guys at OMB; the Clinton administration's pledge to balance the budget in 2002 has seen to that. "The fiscal pinch is becoming a bear hug," G. Edward DeSeve, OMB controller, told the program managers forum.

As a result, you can bid adieu to the days when OMB and Congress would fork over funds for assets with price tags in the hundreds of millions of dollars and delivery dates a decade or more in the future. No longer will budget analysts and legislators pour good money after bad trying to salvage acquisitions that are behind schedule and have vastly overrun their budgets. Put any of that stuff in your budget request today and you can expect a tough interrogation by OMB and a trip to the woodshed with your congressional appropriators. Questions about how assets are related to agency missions, what they are intended to accomplish, and why buying them is better than any other alternative will become "a boring mantra" during budget reviews, DeSeve predicts.

Measure Twice, Cut Once

The budget game is all about business cases these days, especially when it comes to big-ticket items with a useful life of more than two years, such as information technology systems; buildings, hospitals and research facilities; prisons; medical, scientific and space program equipment; dams and power plants; and weapons systems. Those capital assets, especially the ones closely tied to agency missions or involving lots of risk, now are getting scrubbed within an inch of their lives in the budget process. The new scrutiny means new headaches for managers, buyers and users of capital assets, because it falls to them to justify buying and owning them.

Since 1994, OMB has made special efforts to improve the way agencies buy, manage, maintain and dispose of large assets. The hope is that cleaning up huge cost and schedule overruns like those of the IRS tax modernization system, the Federal Aviation Administration's air traffic control system and the FBI's fingerprint identification system will convince Americans their government truly can manage its way out of a paper bag. As DeSeve told his audience, "Inability to operate systems raises questions about management ability. Good management equals good government." So what better place to focus management improvement efforts than on capital assets, for which the administration seeks more than $60 billion in 1998?

To improve asset management, OMB is issuing this month a new "Capital Programming Guide," which wraps together the requirements of GPRA, the 1994 Federal Acquisition Streamlining Act and the 1996 Clinger-Cohen Act's information technology management reform. The guide is intended to move managers away from battling for dollars after asset purchases have overrun cost and schedule goals toward cautious, measured consideration of every possible alternative before buying assets at all. OMB's comprehensive asset planning and budgeting approach embodies the carpenter's adage: Measure it twice because you can only cut it once.

Bridge Performance Gaps

A December 1996 draft of the new OMB guide envisions a single integrated project team-consisting of accounting, procurement and program people-driving each major asset from planning, through acquisition and maintenance to disposal. That's a big change from the haphazard adhocracy of ever-changing characters whose fingerprints obscured the goals and hid the overruns of many major programs in the past. OMB recommends another major departure from past practice: Every agency program and its assets must play a vital role in achieving the strategic plan and should be held to performance goals.

If a review of current programs finds gaps between planned and actual performance, managers should kick off a search for ways to close the gaps, the guide advises. Acquiring capital assets should be just one of many alternatives managers consider. Before choosing a gap-bridging solution, managers are directed to ask OMB's "three pesky questions": Is the function the asset will support tied directly to our agency mission? Could another agency, government or private entity do the job better? Have our processes been reengineered to give the best performance at the lowest cost? OMB emphasizes that whenever possible, managers should choose other alternatives-redesigning programs, cross-servicing with other agencies, leasing or outsourcing, for example-over buying capital assets.

If, after all is said and done, buying an asset turns out to be the most cost-effective and practical way to close a performance gap, the integrated product team takes over. It does research to find out whether capital assets already on the market can meet the agency's need, whether the agency can afford the asset, and whether the costs and potential benefits make the asset a likely winner in the competition for a slot in the agency's asset portfolio. The proposal to buy an asset must include the costs of operating, maintaining and disposing of it. Agency executives review the entire agency investment portfolio to devise an agency capital plan showing already owned assets, new ones under consideration, the performance gaps new assets are intended to close, and justifications for them.

OMB and Congress get their whacks at new assets when the agency submits its annual budget proposal containing full, up-front funding requests for them. The budget passback and appropriations process may force the agency to defend asset requests and change funding levels and financing mechanisms. Reductions to the agency's request can force it to redesign cost, scheduling or performance goals. If the budget request withstands the formal appropriations process, the next stage of capital programming begins.

Factor for Risk

Money in hand, the agency goes back to the drawing board to see whether buying the asset still makes sense after the year or more the funding request has spent in the budget process. If so, the product team must analyze and report on the risk of going forward-and then work to limit that risk.

Budget staffers expect agencies to add to asset cost estimates a dollar figure representing risk. For example, the cost of acquiring a cutting-edge technology should be increased by a risk factor in an agency where managers lack experience with similar operations. To reduce risks, the team should avoid or limit purchases of developmental items not already on the market, use competition and incentives to encourage contractors to keep costs low, and continuously measure successes and failures in order to hold contractors accountable.

The product team is expected to break big buys into smaller, stand-alone chunks that can survive and deliver service even if the entire acquisition never is completed. Teams also should take advantage of industry's intelligence, says Muzio. "We need to say, 'This is what I think I want' and let industry come in and define for us what we really need and what the market can provide." Acquisition reform lets agencies gather information about contractors' capability before formal bidding begins and test prototypes of products before settling on a design, OMB's guide advises.

OMB favors performance-based, fixed-price contracts written in terms of mission needs, schedule and cost, not equipment and manner of accomplishing the work. Government gets a better deal when contractors design their own approaches, the guide says. By law, once a contract is let, the acquisition must meet no less than 90 percent of cost, schedule and performance goals. Dipping below the 90 percent level should trigger an agency review, corrective action and a report to OMB.

Under the Federal Acquisition Streamlining Act, budget staffers will be looking over team members' shoulders at least once a year anyway to gather data to report to Congress on all major acquisitions. Per GPRA, managers must measure performance as long as assets are in use. They also must follow maintenance and disposal plans included in the budget proposal.

Safe Harbor

OMB's guide will not be mandatory, but DeSeve hopes it will do such a good job of tying together recent legislation and will prove so helpful to managers that they won't be able to resist using it. Following the guide will provide safe harbor for those on the front lines of asset acquisition, he says, by giving them a monitoring system to prevent unpleasant surprises and a way to prove they've been keeping a close eye on contractors. In headquarters offices, capital programming will serve as a distant early warning system for top management. Using consistent terms and procedures to take the temperature of high-cost programs and flagging those needing course corrections should help prevent fiascoes that end up on the evening news.

Federal managers can expect a visit from budget staffers soon as part of their PR campaign to roll out the "Capital Programming Guide." OMB officials plan to meet with finance, information technology, and acquisition offices and program staffers. "We're trying to surround them to make it clear we expect everybody to take responsibility for this," says DeSeve. "We need to go agency by agency and talk about how to use the guide and hopefully encourage them to develop thoughtful responses about how to train their own folks."

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