Targeting Jobs

ore than 400 clerks, secretaries and administrative assistants at Naval Sea Systems Command headquarters in a high-rise near Washington's Reagan National Airport watched anxiously last fall as their jobs were analyzed in preparation for packaging as a contract to be offered to the lowest bidder in February.

In a search for ways to cut costs, the command is analyzing all of its non-inherently governmental jobs for possible outsourcing. The administrative and clerical jobs at NAVSEA headquarters in Arlington, Va., were the first to go on the auction block, a command spokeswoman says, because they were the largest single group of positions there. If the employees can get the work done more efficiently than a private contractor can, the employees will get to keep their jobs, under the rules of public-private competitions established by Office of Management and Budget Circular A-76. Otherwise, a contractor will provide support services and the Navy employees will have to find work elsewhere-perhaps on the payrolls of the contractors brought in to replace them.

The NAVSEA headquarters employees are among 80,000 civilian Defense Department employees whose jobs are currently in the process of being competed under A-76. Until now, these outsourcing dramas were unfolding mostly in Defense Department organizations such as NAVSEA, rather than civilian agencies.

But that could begin to change in the coming months as the 1998 Federal Activities Inventory Reform (FAIR) Act takes root. Early in the FAIR Act implementation cycle in October, civilian agencies identified about 200,000 jobs-more than one-third of all of their jobs-as commercial in nature and potential candidates for outsourcing. With more than 300,000 commercial jobs already identified by DoD, it's likely that more than half a million federal jobs will go out for bids in the next few years.

The FAIR Act requires executive branch agencies to determine whether each federal job is inherently governmental or commercial-that is, a function being performed in the private sector. Agencies must create lists of all jobs that are not inherently governmental each year, and publish them after OMB review.

It's up to each agency to decide whether to contract out jobs on the lists or perform the work in-house, says Deidre Lee, director of the Office of Federal Procurement Policy at OMB. Some agencies indicated that certain jobs on their lists are unlikely to be contracted out, and in October, representatives of prospective contractors challenged some of those designations. The law gives affected vendors, employees and organizations representing them the right to challenge agencies' lists within 30 days after they are published.

Because OMB did not prescribe a format for the lists, the agencies came up with a variety of formats, some of them with more information than others. For example, the Centers for Disease Control reported it has 1,008 management employees and another 138 support staff in the category of Regulatory Management and Support Services at its Atlanta headquarters. These are "core" jobs in the "OD/OD"-presumably, Office of the Director-and the agency is not planning to contract them out. The list failed to further describe the jobs.

The tiny Inter-American Foundation, on the other hand, listed job titles and office assignments for 3.12 commercial positions, all of which the foundation is considering contracting out. And NASA described 7,957 commercial jobs, none of which it plans to outsource.

The variety of formats and the fact that most agencies chose not to publish their initial lists on the World Wide Web, distributing them instead by e-mail and fax or on paper in response to telephone requests, prompted considerable criticism from contractor organizations and Congress. "It is ironic that, for access to information about the government's commercial activities, the public must rely on a private-sector magazine, Government Executive, which has posted all of the inventories on its Web site," said Sen. Craig Thomas, R-Wyo., principal sponsor of the FAIR Act, at a hearing. (See www.govexec.com/fairact for the full lists.) OFPP's Lee was quick to promise improvements in the process.

The Big Question

But no amount of process improvement can help agencies (and, for that matter, contractors) answer the big question: Which jobs shouldn't be contracted out because they are inherently governmental? The FAIR Act defines an "inherently governmental function" as one "that is so intimately related to the public interest as to require performance by federal government employees." It goes on to list some clearly governmental activities, such as diplomacy, issuing orders and regulations, disbursing funds and property, and supervising federal employees. It also lists several examples of commercial activities, such as warehouse operations, building security and "gathering information for or providing advice, opinions, recommendations or ideas to federal government officials."

There is a large gray area in between those categories, OMB officials acknowledge. What about the person who supervises contractor employees handling accounts payable? Yes, the supervisor is overseeing disbursement of federal funds, but there's very little room to exercise discretion about whom or when to pay a bill. Questions about payment policies can be referred to a senior federal employee. What about issuing agency press releases after getting them approved by senior federal employees? How about deciding on the interior design for specific federal offices, within established design guidelines?

"The decision over what is inherently governmental is the most inherently governmental decision in government," says Dave Childs, a senior budget examiner at OMB who specializes in such issues. Such decisions could alter the future shape of government, and big money is involved. Childs told a group of information technology vendors in October that the Defense Department alone is considering outsourcing 230,000 jobs. "Do the arithmetic," he said: Multiply the number of employees by $70,000 in salary and related costs per employee per year, and then multiply again by 1.5 to account for materials and other costs associated with doing the work. Childs didn't supply the grand total, but it's $24 billion per year, for just the Defense Department.

It's no surprise, then, that federal contractors were eagerly calling agencies for their first FAIR Act inventories. But many of them were "profoundly disappointed" in the lists, says Bert M.Concklin, president of the Professional Services Council, which represents firms that provide professional and technical services such as consulting, accounting and architectural expertise to the government.

Some members of Congress reacted similarly. For example, Sen. Fred Thompson, R-Tenn., who chairs the Senate Governmental Affairs Committee, wanted to know why NASA doesn't expect to contract out any of its nearly 8,000 commercial jobs.

"That doesn't make sense," Thompson said. "If these jobs are commercial
activities, shouldn't we know who can do it cheaper and more efficiently? Shouldn't these functions be competed? It's time for federal agencies to look beyond the letter of the law and find ways to restore public confidence that taxpayer-funded activities are provided in the most efficient manner possible."

While members of the Professional Services Council, the Information Technology Association of America, the U.S. Chamber of Commerce and other business organizations collaborated in challenging agencies' inventories, the American Federation of Government Employees (AFGE) and other labor organizations criticized the lists as too extensive. Under OMB guidelines, agencies are supposed to respond quickly to the challenges.

What Next?

Once the inventories are final, what happens next? Not much more is required by the FAIR Act. Although some members of Congress had initially sought to require agencies to compete their commercial jobs over a certain period of time, the law reflects the view of former OMB executive G. Edward DeSeve. At a March 1998 hearing on the bill, DeSeve urged Congress not to mandate competitions but rather to "allow the forces of declining budgets and the market to require that these competitions are conducted."

Those market forces and declining budgets are real. The government is feeling the effects of the business-school philosophy that urges corporations to focus on their "core competencies" and look outside their organizations for performance of other functions. Meanwhile, agencies are expected to modernize and streamline their operations in accordance with the electronic-government and reinvention drives. And many agencies are finding it difficult to hire and retain skilled employees, increasing their reliance on contractors.

More outsourcing means more public-private competitions for jobs, as prescribed by Circular A-76 and its accompanying guidance. Under the FAIR Act and OMB rules, A-76 is the only avenue normally open to agencies that wish to use contractors to perform work that's being done in house. The circular lays out a lengthy and rather rigid process. Agencies must draw up a statement of work to be performed, organize the employees into a "most efficient organization" that can compete to retain the work in house, and then compete the in-house plan against contractors' offers to do the same work.

To warrant outsourcing, the winning contractor's bid must be at least 10 percent less expensive than the in-house bid. That, plus the use of an arbitrary 12 percent rate for overhead costs for government operations, skew the competitions in favor of the in-house teams, in the view of many contractors. Among IT vendors who do contract work for the government, for example, a 40 percent overhead rate would be considered normal. OMB officials defend the 12 percent rate as reasonable and point out that government costs aren't entirely comparable to those in corporations.

For example, they say, agencies don't buy insurance policies to protect against accidental loss of assets, a cost that contributes to private-sector overhead. What's more, OMB officials say, overhead costs, such as rent, sometimes remain the same even if the work shifts to a contractor. In many outsourcing arrangements, for example, contractor employees work in a federal building or on a military base, so rent shouldn't be a factor in those cost comparisons.

Childs said agencies' cost accounting is based on "budgetary cost," or the amount appropriated for agency spending. Though agencies often do not have to budget for rent or pensions, these are real costs, he observed. In the current environment of inadequate federal accounting systems, he said, "it's hard to get a federal employee to understand that the taxpayer is really paying the cost" of rent, pensions and other unbudgeted items.

The government is slowly remedying the longstanding deficiencies of its accounting systems. In the meantime, the FAIR Act requires agencies to produce the most accurate possible statements of their costs for use in outsourcing competitions.

The Cost of Competition

One irony is that some technical and professional services companies-often the same companies that might bid for outsourced work-are looking to the law as a source of new revenue streams. They'll help agencies develop statements of work and reorganization plans, do cost analyses, evaluate alternative acquisition approaches and even draw up plans for communicating with the affected employees. In September, the Joint Chiefs of Staff in the Pentagon hired Performance Engineering Corp. of Fairfax, Va., to assist in outsourcing the organization's desktop network and computer support services. The price tag on the assistance contract: $327,000.

The magnitude of that sum shouldn't surprise anyone who has been through an A-76 competition. It's a time-consuming and resource-intensive process. The Air Force Reserve Command began competing operations at 13 of its bases in 1996. Until last month, it had completed only two competitions, both of which were won by the private sector.

The General Accounting Office reported this year that competitions involving a single military support function-vehicle maintenance, for example, or housing management-took 18 months, on average, while those for multiple functions took 30 months. That's an improvement over earlier GAO findings of a 51-month duration for the average competition from 1987 through 1990. But it still is a long time for employees to undergo the uncertainty and disruption associated with the process.

The cost of A-76 studies is a favorite topic among those on both sides of the process. On the government side, it's no small matter to develop a performance work statement, which describes the work now being done by federal employees. The statements typically run hundreds and sometimes thousands of pages. Agencies are required to consult with employees about these documents, a process that can consume hundreds of hours in meetings. Then there's the challenge of creating the most efficient organization (MEO)-a streamlined operation with fewer workers.

Even those employees whose jobs survive the MEO process usually must change their ways. At NAVSEA, for example, the command moved some of the clerical workers into a shared-services unit, much like the typing pool found in offices of the 1970s. Until this year, those workers were assigned to particular headquarters offices. Of course, being more efficient because of the pool organization doesn't guarantee that they will win the competition to do the work over the long term.

During such reorganizations, according to experienced observers, it's common for the most capable and adaptable employees to look elsewhere for work, leaving behind those who are unprepared for change. The process is "a terrible tax on the employees," says Stephen M. Sorett, director of government contract services for Grant Thornton, an accounting and consulting firm. "The workforce gets demoralized." A Navy employee involved in A-76 studies calls it "a real scary thing which causes more paralysis than performance."

If the human costs of the process are high, the dollar costs probably are too, but there are very few records of what agencies have spent on A-76 activities. It took the National Oceanic and Atmospheric Administration 10 staff years over a 19-month period to complete a study on privatizing the operation of a single NOAA ship, a GAO official told Congress last year. The upshot of the study? There were no bids from the private sector. "It would have required even more resources if NOAA had received offers to perform the work," said J. Christopher Mihm, associate director for federal management and workforce issues in GAO's General Government Division. Contractors, meanwhile, say it can cost them $25,000 or more to prepare a bid in an A-76 situation.

GAO's National Security and International Affairs Division reported this year that many of the military commands that would be undertaking A-76 studies were planning to spend $7,000 or more per position. In the same report, "DoD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key Reform Initiative" (NSIAD-99-46), the congressional auditors said the military services had not budgeted the full amount of "separation costs" such as early retirement and severance payments for employees whose jobs are slated to be eliminated. GAO warned that "net short-term savings are unlikely to be achieved in the amounts or as quickly as DoD projected."

It is widely agreed that the A-76 process does cut costs-usually by 20 percent or so-whether or not jobs are outsourced. Most of the savings are associated with job cuts, according to GAO. The process reduces costs whether or not it ultimately results in outsourcing, because of the formation of the "most efficient organization." Of course, a private contractor can have an even more efficient organization and underbid the federal organization. That happens about 60 percent of the time.

With the government winning 40 percent of the time, more than one contractor has suggested that the competitions are bogus. "The government competes the contract against itself," a contractor complained at the meeting where OMB's Childs explained the process to contractors. Some suspicious contractors are asking whether there is any means of enforcing whether the MEO stays in place once the competition is over.

Other contractors still are chortling cynically about a GAO decision early this year involving an Air Force decision to reject all contractor proposals for base operations and maintenance work at Wright-Patterson Air Force Base, Ohio. GAO ruled that the source selection board had a conflict of interest because 14 of the 16 evaluators would lose their jobs if the work were outsourced. (In September, the Office of Government Ethics took the opposite stance, holding that the same competition was proper, but OMB's Childs says the Wright-Patterson situation "won't happen again, as a matter of policy.")

One sales executive for a company that specializes in IT outsourcing wonders whether the government is simply using contractors to force agencies to downsize and reengineer their operations, without necessarily outsourcing anything.

On the other side, employees say the process often is rigged in favor of contractors, intentionally or not. "These studies have been engineered for in-house failure," says Jerome LaLonde, president of AFGE Local 1997 in Minneapolis-St. Paul, which sought to fend off outsourcing of base operations at the Air Force Reserve base there. LaLonde questioned many of the technical aspects of the competition, such as a decision that the Davis-Bacon Act could not be applied, which held contract wage rates down. "I really don't want to make the claim that it's federal union-busting, but...," says LaLonde. The performance work statements have been riddled with flaws, he adds, noting that a comparable outsourcing contract at a New York base had to be modified 73 times after it was signed.

A non-union, senior employee involved in Navy A-76 studies says executives, rather than managers familiar with how the work is done, have shaped the competitions he has seen. In one case, they eliminated 120 jobs in the rank and file workforce while leaving every manager in place, he says. The result, as he sees it, has been an irreversible loss of in-house know-how.

Forked Tongue

Some of the cynicism expressed by those involved with A-76 can be traced back to ambivalence about outsourcing among policy-makers at the highest levels. The policy-makers are being pushed by business interests to outsource more government operations and pulled by unions to prohibit outsourcing. Congress and the White House unsteadily walk the line between the two.

Until 1994, legislative restrictions hobbled most outsourcing initiatives. Deficit reduction pressures, the drive to make government more businesslike and the ascendancy of the Republican Congress contributed to the policy shift. Current Republican ideology favors a smaller and less activist federal government, but even the most fervent advocates of less government and lower taxes wince when budget-cutting hits their own home districts. For example, the FAIR Act author, Sen. Thomas, has said that "by controlling federal spending, we will usher in a new era of growth and prosperity in America." But this fall, when the Veterans Affairs Department laid off 25 employees at its hospital in Sheridan, Wyo., citing budget pressures, Thomas joined in the Wyoming congressional delegation's effort to persuade the VA to reverse course.

Likewise, this fall, just one year after the FAIR Act was passed, the House Appropriations Committee filed a report on the fiscal 2000 Defense appropriations measure saying: "The committee harbors serious concerns about the current DoD outsourcing and privatization effort. While the committee recognizes the need to reduce DoD infrastructure costs, the cost savings benefits from the current outsourcing and privatization effort are, at best, debatable." The report said that "high-cost contractors [are] simply replacing government employees" and that "DoD appears to be moving toward a situation in which contractors are overseeing and paying one another with little DoD oversight or supervision." The appropriations act directs the department to produce by February a detailed report on implementation of A-76 since 1995, including the cost of the work before and after outsourcing.

The Clinton administration seems equally ambivalent about outsourcing. For example, OMB's Childs insists that "OMB is taking the FAIR Act extremely seriously." But at bottom, the law simply mandates compliance with a longstanding A-76 provision requiring agencies to compile lists of commercial jobs annually. OMB didn't enforce this provision consistently in the past.

What's more, the White House has stood in the way of direct outsourcing of commercial activities, requiring agencies to take the time-consuming public-private competition route in most cases. The American Consulting Engineers Council, the Professional Services Council and other business organizations say that agencies should be
allowed to outsource by offering the work directly to the private sector.

A 1998 report from the RAND organization, a think tank in Santa Monica, Calif., says administration policy and legislation "are generally predisposed to outsourcing commercial activities. They also contain many restraints and exclusions, some of which seem to have rational underpinnings and some of which seem intended simply to raise impediments."

Given the highly political nature of outsourcing, downsizing and related issues, some observers are predicting that interest in A-76 will fade during the coming presidential election year. The election results will indicate how much clout federal employee unions can exercise; wholesale outsourcing is not likely as long as the unions command the respect of the White House. While some union members object to the A-76 process, leaders like Wiley Pearson, who heads AFGE's anti-privatization campaign, say A-76 gives employees a chance to prove their worth.

The Long Haul

Will the FAIR Act make a difference in the use of the A-76 process? People on both sides of the issue say their expectations are low, but that the law could have an important impact over the long term. "There's a lot of excitement about what the potential of the FAIR Act is," says Andrew Fortin, manager of privatization policy for the U.S. Chamber of Commerce. But, he adds, "the expectations for this first round are realistic and limited."

Concklin of the Professional Services Council describes the situation as "a mid- to long-term war of attrition." Only a relentless campaign will get agencies to compete their commercial work, he says, describing the FAIR Act as an important step in the right direction.

Other observers are betting that budget pressures will increase agencies' dependence on A-76. Despite difficulties the Air Force Reserve Command encountered in competing its base operations, command officials told GAO auditors this year that the completed competitions and resulting contracts with the private sector for just two bases will reduce costs by more than $9 million over five years. The same officials acknowledged they forgot to include snowplowing and grounds maintenance activities in the performance work statement for the Niagara Falls (N.Y.) Air Reserve Station-one of the snowier places in the United States. But when they added in the requisite 7,200 hours of work, they told GAO, the private-sector bid still won the competition.

If the House Appropriations Committee is correct, those savings estimates may be illusory. But as the budget pressures intensify, it's likely that more agencies will begin to eye the 20 percent average savings achieved by the A-76 process and give it a try.