Rules for competition in IT consolidation called too restrictive

Legislative restrictions on the government's ability to contract out jobs performed by civil servants could hinder a governmentwide attempt to streamline financial management computer systems, an industry representative told lawmakers earlier this week.

The Office of Management and Budget's lines of business effort asks agencies to consolidate information technology systems that support rote tasks in common functions such as financial management and human resources, to a handful of public or private sector service providers. OMB said the effort will save money through centralization.

In draft guidance released in late May, OMB said that once agencies determine that they're ready to replace their in-house financial management operations in favor of a shared service center, they must hold a competition that includes bids from the private sector.

In February 2005, OMB officially selected four federal agencies as financial management service providers. Agencies seeking to convert their IT operations would issue a request for proposals and evaluate bids submitted by these OMB-designated federal service centers as well as by private sector companies.

But language in a fiscal 2006 appropriations law requires agencies to rule out private sector bids that do not guarantee savings of at least $10 million or 10 percent of labor costs. That restriction does not apply to public sector bids and, consequently, the rules would put the private sector at a competitive disadvantage, Stan Soloway, president of the Professional Services Council, said Wednesday at a House hearing.

"The entire impact could be very negative for the initiative," Soloway said at the hearing, called by the House Government Reform Subcommittee on Government Management, Finance and Accountability.

Unions officials have said the legislative language levels the playing field for federal employees involved in public-private job competitions. Jacque Simon, public policy director for the American Federation of Government Employees, characterized the lines of business initiative as a waste of taxpayer money, calling it an example of "OMB's obsession with wholesale privatization," in written testimony.

Soloway also argued that companies and federal agencies might try to sidestep the competition requirements by having agencies become service providers in name only and contract out the actual work. The result would be diminished competition, he said.

During the hearing, OMB Controller Linda Combs said Circular A-76 (used to guide public-private competitions) would not apply to lines of business competition among federal agencies. OMB has stressed that private sector competition is an important counterbalance to the potential monopoly service providers could gain.

Most of Wednesday's hearing focused on how to ensure fairness and consistency within the process of choosing a service provider. For example, OMB officially designates federal agencies as providers eligible for governmentwide bidding, but has no mechanism in place to designate private sector companies.

OMB officials have said any company is eligible to compete as a potential service center without an official OMB designation; it's up to individual agencies to evaluate whether companies are qualified. But OMB's draft guidance emphasized the importance of contracting with designated service providers, private sector representatives said.

Without an official designation process "the very real fear is [companies] will be subjugated to subcontracting for the prime [providers], which will be federal agencies across the board," said Jim Krouse, acting director of public sector market analysis at INPUT, a Reston, Va.-based firm.

In addition, an OMB official said federal agencies can explore options beyond the four OMB-designated providers. "We're not going to ignore it if it's a good business decision," said Danny Werfel, chief of the financial integrity and analysis branch within OMB's Office of Federal Financial Management.

Still, OMB won't encourage agencies to look far away from its official designates, Werfel said. "We don't want the agencies that aren't designated to spend a lot of time and energy looking to cross service others. If there's an opportunity that presents itself, great."

OMB officials also are no closer to resolving the problem of how service providers will pay for transition costs if dissatisfied customers decide to leave them and switch to another provider.

It's an unresolved question where providers would get the money. Fiscal law prevents one agency's appropriations from supplementing another's, meaning that the service agency could not use its own funds to pay for a dissatisfied customer's transition. It also could not draw from the fees it collects, for the same reason.

Werfel said agencies should agree on a plan in their service level agreements with providers. But, "Any deal that's worked out with the service level agreement would have to be consistent with appropriations law," he said.