It’s Time To Rethink Entrepreneurialism

ne of the more curious aspects of the president's management ag-enda has been the way fee-for-service entities have managed to fly beneath the radar of the administration's controversial competitive sourcing initiative. The Office of Management and Budget has required agencies to compete 15 percent of their commercial jobs, ranging from lawn care to data processing, by October 2003. The eventual goal is 50 percent. But OMB has set its sights almost exclusively on conventionally funded activities. Also, the Commercial Activities Panel's April report, "Improving the Sourcing Decisions of the Government," virtually ignores fee-for-service operations in its plan to revamp outsourcing rules.

Consider this:

• Why does the Central Intelligence Agency sell administrative services?
• Do the executive coaching and related consulting services offered by the Treasury Department advance the agency's mission?
• Should the Interior Department's Minerals Management Service be brokering fee-based procurement deals for non-Interior bureaus?

FRANCHISE FUNDS

Matthew Weinstock's article, "Building Entrepreneurs," (June) cites the purported benefits of this growth in entrepreneurialism over the past eight years. Among them are leaner support staffs, greater cost transparency and price sensitivity, and innovation through competition.

Many agencies have been authorized to provide interagency reimbursable services for 60 years, since the 1932 Economy Act, but the acceleration triggered by the Clinton administration's reinventing government drive has been vertiginous. Most notable was the passage of the 1994 Government Management Reform Act (GMRA), which launched franchise fund pilots at six departments.

These funds soon will be up for reauthorization and perhaps expansion across government. Neither the General Accounting Office nor OMB has seriously studied the pilots, and no congressional hearings have been scheduled to examine the reauthorization question.

These franchise funds have grown rapidly, to say the least. Treasury alone has 11 entities operating as franchise funds, whose revenues have more than tripled in the past four years.

Weinstock pegs annual franchise fund revenues at the six pilot agencies at about a half billion dollars, but other estimates are higher. Treasury's revenues alone totaled $223 million in fiscal 2001, and the department is by no means the largest franchise fund operator in government.

BEYOND THE MISSION

Franchise funds are only the latest version of working capital, industrial and revolving funds that enable agencies to supplement their congressional appropriations through interagency sales, which now total close to $150 billion a year. Franchise fund agencies are unique, however, because GMRA extended interagency sales authority beyond agencies' core missions to include common support services.But unlike traditional administrative shops, franchise fund activities were not established to support their agencies' missions, but rather to increase market share, produce cost efficiencies, and generate revenue to sustain their existence. They were expected to survive-even thrive-without dipping into their agencies' appropriations.

Before GMRA, reimbursable interagency sales under the Economy Act were, for the most part, limited to those that flowed naturally from agencies' core missions. For example, the Office of Personnel Management (and its predecessor, the Civil Service Commission) has been selling services to sister agencies since the 1950s, but always in the fields of training, human resource management and background investigations-areas grounded in OPM's mission. OPM, like all fee-for-service providers, engages in questionable head-to-head competition with private sector firms and other agencies, but its reimbursable services grow directly from the desire of other agencies to tap OPM's personnel expertise and rely on its statutory credibility. This is not the case with franchise funds.

The conventional wisdom is that these entrepreneurial entities reduce overhead costs across government and free up agency resources for mission-directed activities. But there has yet to be any serious study to verify the claim. And there appears to be just as much basis for questioning the relative cost-effectiveness of fee-for-service operations, at least when compared with similar services provided by the private sector.

When asked why franchise, revolving and working capital funds should not be privatized or outsourced, managers usually say they already contract out 70 percent to 80 percent of their work. While this is apparently true, they rarely mention the number of employees who manage these activities. When salaries, benefits and unfunded liability costs are factored in, the governmental funds committed to these classically commercial activities jumps markedly.

Indeed, one of the real dangers of fee-for-service entities is their potential to mask the true costs of government and reduce Congress' ability to track funds and oversee agency operations. A senior director at the Joint Financial Management Improvement Program characterizes interagency sales as being in a state of chaos. "Everybody does something different, even in the same department," she says. At some agencies, revolving fund revenues have even helped subsidize the costs of inherently governmental activities. As Weinstock says, "Entrepreneurs often find themselves at odds with a power structure that does not like losing control." Perhaps, but Congress probably needs to exercise more control, not less.

The administration has taken several steps that indicate it plans to scrutinize entrepreneurialism more. OMB recently proposed a rule that will require agencies to open interservice support agreements, so-called

ISSAs, to competition every three to five years. Previously, these agreements-which predominantly have been creatures of entrepreneurial federal entities such as franchise, working capital and revolving funds-could be renewed repeatedly by a customer agency without competition. This is one of the monopolistic advantages federal agencies have traditionally held over the private sector. OMB's rule levels the playing field, since these agreements will now more closely resemble standard contracts, and the agency providing the service will be forced to keep a close eye on costs since it will eventually face competition.

In another effort to get a better handle on interagency transactions, FAIR Act guidance from OMB in fiscal 2002 required agencies to report the number of employees funded through reimbursable agreements. Administration sources say additional steps are being considered.

TIME TO RECONSIDER

It is time for the stakeholders-specifically congressional oversight committees, GAO and OMB-to take a long, hard policy look at fee-for-service operations in government. With the administration's push to competitively source commercial activities, the imminent reauthorization and likely expansion of franchise funds, and the seemingly untrammeled growth of entrepreneurialism even in central management agencies such as the General Services Administration and OPM, we need to identify the true costs of fee-based entities. That means looking at the number and cost of employees devoted to these classically commercial, non-mission activities, and, most important, the core questions regarding their very existence.

The Bush administration seems to sense the danger in letting these activities get out of hand. Now it needs to start a serious conversation about the past, present and future of entrepreneurialism.