Tangled Lines of Business

The administration's plan to consolidate technology is tied up in its own contradictions.

The Office of Management and Budget is pulling the plug on computer systems that agencies use to support administrative work. Under its "lines of business" initiative, only a handful will remain to serve all of government. But despite OMB's determination that a few public and private administrative service centers displace the current array of disparate agency systems, its initiative could be tripped up in a tangle. Federally run fee-for-service operations have a troubled history. Government often is stymied by large-scale information technology projects. And OMB has yet to work out important details concerning public-private price competition and the treatment of unhappy customers.

In March 2004, the budget office first called together representatives from across government to examine administrative functions common to all agencies. Among the targeted areas were human resources, financial management and the processing of federal grant applications. The technology underpinning these lines of business was ripe for centralization and consolidation, OMB believed.

Other agencies weren't so sure. During a May 2004 meeting of the human resources task force, members proposed that OMB leave agencies free to buy their own systems, instead imposing standards for new software. OMB's preferred solution was to have agencies pay a handful of their federal counterparts or private companies to provide common services. John Sindelar, a General Services Administration official and the OMB-appointed line of business project manager, wanted agency representatives to drop their opposition. "I got up from around the table . . . and took the chair and set it down in front of everybody and said we weren't going to do it that way," Sindelar recalls. "They felt that maybe this was an OMB play to slam this down their throats."

Two years later, OMB is treating the coming of cross-agency service centers as irreversible. "We have said this is the way that we're going to run the federal government and that's the way we're going to run it," said Clay Johnson, OMB's deputy director for management, at a Feb. 15 luncheon sponsored by Government Executive and the National Academy of Public Administration.

"The current way we do business is not getting the results that we need," says Karen Evans, OMB administrator for e-government and IT, and the guiding influence behind the lines of business initiative.

Service centers' offerings will vary from remotely hosting hardware and software to deeper levels of management support. Customer agencies will remain responsible for the actual functions, such as hiring and firing people, that the lines of business support.

Some service centers already are up and running. Though they can be federal or private company operations, agency-run centers predominate for now. The Housing and Urban Development Department is buying human resources services from a Treasury Department center. Other agencies, such as the Environmental Protection Agency, are getting ready to outsource their financial management systems.

The list of shared services soon will include cybersecurity and could encompass help desks and data centers, telecommunications and geospatial systems. Systems that agencies now use to perform lines of business functions will stay in place until they're due for replacement, according to OMB. Thereafter, unless an agency is one of three to five intergovernmental providers for those systems, it will become a customer of another agency or a company, absent an especially compelling case.

Why Bother?

The idea of having agencies set up businesslike operations isn't new. It dates back to the 1932 Economy Act, which permits agencies to perform reimbursable work for each other. Combining that approach with technology was the main idea behind the 24 OMB-led e-government initiatives. And today, it is nearly impossible to argue against the concept of back-office consolidations. It's standard operating procedure in the private sector. Tighter federal budgets make it imperative, supporters say.

But centralized IT systems often have promised savings that were later sucked away by botched implementation. Many agencies have ended up paying for two systems-a new, centralized one and a shadow work-around that actually gets used. The lines of business initiative also risks running into congressional opposition, especially in the House Appropriations Committee, which is suspicious of OMB-mandated intergovernmental money transfers. Companies are concerned that the playing field will be uneven when they compete against agencies.

The government's history of managing reimbursable cross-agency service centers, even within the confines of a single department, is not stellar. The Homeland Security Department's Immigration and Customs Enforcement bureau instituted an emergency hiring freeze in 2004 due to a shortfall of funds created in part by mismanagement of its shared services function. "We were providing service to other agencies and not necessarily being reimbursed," says ICE spokesman Dean Boyd. A government official, who asked to remain anonymous, questions why agencies would volunteer to become service providers: "You wonder if at some point a manager is going to look and say, 'Why am I taking all this risk and having all this distraction for something that is not a core mission?' " Unlike companies, federal service providers can't earn a profit.

They might not get rich, but providers will gain economies of scale. Distributing infrastructure costs over a greater number of agencies drives down unit costs-assuming everything goes right. There are drawbacks: "If you have one failed implementation, your savings are gone," says a House staffer who requested anonymity. And while savings accrue to both customers and providers, "the vast majority of the benefits, including cost savings, are in the client organizations, not the service providers," notes Doug Bourgeois, director of the Interior Department's National Business Center, a line of business provider for financial and human resource management.

But providers avoid the rigmarole associated with outsourcing IT functions. They don't have to retrain personnel or endure massive change management. They don't have to accommodate a new set of business processes, nor prepare their data for storage elsewhere. They can take advantage of accumulated expertise within the service centers, making technology implementation a safer bet. And they can count on their own people to look after their interests.

Take the Agriculture Department, a volunteer to provide HR services. "If something went wrong with somebody else's system or they weren't available at midnight when we needed it, that would become a problem for USDA," says Charles Christopherson, the department's chief financial officer. OMB says binding agreements on levels of service will guarantee that customers get what they need when they need it. So why isn't Agriculture willing to become a customer, rather than a provider? "It's important that we have the correct functionality for USDA," Christopherson says.

Unhappy Customers

Inserting market principles into the federal government can cause real trouble. For example, what happens should a dissatisfied agency take its business elsewhere and stop paying a service center in the middle of a fiscal year? In the private sector, if costs exceed revenue, then the answer is simple: Lay people off. Letting go of federal employees should shortfalls occur is "something that the federal government provider is going to have to think about," says Evans.

Providers also accept responsibility for paying the costs an unhappy customer would incur to move to another center if it can prove it received subpar service, Evans says. Liability for transition costs prevents providers from holding customers hostage to capricious behavior, she adds.

But where will the money for transitions come from? It can't come from a federal provider's appropriated funds-it's illegal for one department to supplement another's budget. It can't come from a percentage of the fees the service provider collects from every agency, for the same reason. "If we had a customer and they were unhappy and they wanted to go somewhere else, my understanding is [customers] would have to pay for it," says Larry Neff, the Transportation Department's deputy CFO. Treasury also provides financial management services. Holding providers liable would drive up prices, says Nina Hatfield, the Interior Department's deputy assistant secretary for policy, management and budget. Evans says OMB is studying the matter and has yet to issue an official policy.

Companies aren't keen on the notion of paying customers to go away. It's not exactly a commercial practice for them, says John Marshall, vice president at Fairfax, Va.-based CGI Federal, an IT services company. CGI plans to compete as a service provider. Plus, "What constitutes successfully transferring from one provider to another?" says Andrew Malay, a federal sector vice president of SAP, a Newtown Square, Pa.-based financial management software company. When will the disgruntled customer's new provider be ready to accept additional clients? Does the first provider continue paying transition costs in the interim? "It's basically an open-ended liability" and it's unlikely any company would accept that, Malay adds.

Costs and Conflicts

Federal providers will have to add more infrastructure to handle new clients. Interior says it will make customers pay for additional personnel and equipment. Agriculture says it's fronting some of the expense from its working capital fund. The costs amount to millions of dollars-"small millions, not large millions," Christopherson says.

The investment probably is less than what the department would pay to move its HR systems to another agency, he adds. But appropriators have not looked kindly on agencies using their own funds to pay for intergovernmental initiatives. The House Appropriations Committee has not yet received a briefing on the lines of business initiative, but members have questions about funding sources, says spokesman John Scofield.

Industry involvement is a key to keeping prices low and service good. But the government's ability to capture all its costs in order to accurately compare prices with the private sector isn't great, says Stan Soloway, president of the Professional Services Council, an Arlington, Va.-based group that represents contractors. Government officials say they've improved their accounting, but companies worry that federal agencies still can't identify and include all their costs.

The private sector also wonders whether it's disadvantaged by other pricing differences. If a company enters into a fixed-price contract to provide services, then its prices are binding even if it underestimated costs. What if a government provider lowballed its prices based on inaccurate cost accounting? Would a federal provider, like a company, have to absorb the losses? How long can a money-losing federal service provider stay open for business? Or, would the federal provider simply raise prices, something companies won't be able to do? There's not a legally enforceable contract that prevents a federal agency from price hiking, Marshall says. Agencies sign memorandums of understanding with their clients, but MOUs don't carry the legal weight of contracts. OMB is investigating whether interagency agreements can be strengthened, Evans says.

Public-private competition presents another hurdle. Federal providers often contract with companies to deliver services. The Interior Department, for example, will rely partly on CGI Federal for its financial management offerings. So what happens if Interior, with CGI Federal as a partner, competes for work that CGI Federal also bids on? "It does present the potential for conflict of interest," says Interior's Bourgeois. Companies working for agencies and competing with them will have to enforce nondisclosure agreements and strictly separate the teams fashioning bids for the same work, he adds.

Despite OMB's insistence that it will take root governmentwide, the initiative remains relatively unknown outside IT. "I think there's a lot of uncertainty. Not, 'Is this a good initiative, a worthy goal,' but just how to do it," said Rep. Todd Platts, R-Pa., on March 15 during a hearing of the House Government Reform Subcommittee on Government Management, Finance and Accountability.

"Do we have all of this worked out? The answer is no," Evans says.

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