Buyer's Market

ederal program managers have more options than ever before in obtaining quality administrative support at low cost. That should be good news, given demands from Congress and the public for improved performance in a tight budget climate. Yet many managers are not aware of the growing spectrum of choices they have in such areas as payroll, human resources, information technology and financial and cost accounting.

Choice, quality and cost of administrative services are improving thanks to the age-old capitalist principle of competition. An unorthodox group of competitors is crowding the market-not only private firms, but also quasi-independent government units and other entrepreneurial operations within federal agencies.

The new market for administrative services has not emerged without controversy. Some in Congress argue that government entrepreneurs should not be in competition with private-sector service suppliers. But while that political debate continues, the market grows.

Already, managers can get support services from a variety of federal operations:

• Consolidated administrative centers, in their own departments or others.
• "Franchise fund" business units set up
  under the 1994 Government Management Reform Act.
• The business units of franchise-like funds established under agency-specific legislation.
• Long-established "cross-servicing" operations like the Agriculture Department's National Finance Center, which provides payroll services to dozens of agencies.

• Turning to former government specialists who have migrated to organizations operated under an employee stock ownership plan.
• Issuing a task order against a governmentwide acquisition contract.
• Buying services directly from a nonprofit organization or a commercial company.

Tight budgets and reduced staffs are driving development of the new market for administrative services. Agencies now employ some 316,000 fewer people than they did five years ago, forcing them to concentrate directly on their core missions. Administrative occupations were at the top of the list for reductions, leading to the widespread consolidation and outsourcing of support services.

Buying Support Services

At the beginning of the Clinton administration, Vice President Al Gore's National Performance Review introduced the term "franchising" to describe federal organizations that compete to provide administrative services, charging fees to cover their costs. It was an idea built on the practice that many agencies had been providing reimbursable services for years.

The 1994 Government Management Reform Act, which permitted six agencies to establish working capital funds to run franchise operations, specified that the franchises must be competitive and self-sustaining. Previous cross-servicing organizations were able to dip into appropriated funds to cover income shortfalls. In 1996, six pilot agencies were designated: the Environmental Protection Agency and the departments of Commerce, Health and Human Services, Interior, Treasury and Veterans Affairs. Recently, the Transportation Department and Central Intelligence Agency have obtained nearly identical legislative authority to operate similar funds offering services competitively.

Since 1994, many of the established cross-servicing agencies have continued or expanded their reimbursable business, and others not previously offering services have further crowded the field. Some of the new entrants are doing so for survival, having been told by their parent agencies that their staffs no longer can be sustained through shrinking agency appropriations. Leaders of others believe they are "best in class" and want to prove it by finding and retaining customers.

The plethora of federal organizations competing to offer reimbursable administrative support clearly has created a buyer's market. But it also has raised a series of questions. Are the sellers permitting managers within their agencies real freedom to buy services elsewhere? Are all providers counting the same costs in pricing their services? Or are some agencies subsidizing their reimbursable organizations with appropriated funds?

The Office of Management and Budget and a committee established by the government's Chief Financial Officers Council have been dealing with these questions as they relate to federal operations that compete both with each other and with industry. An OMB/CFO Council team developed 12 operating principles that now govern all franchise-type operations in the government:

• Competition: Interagency support organizations cannot be monopolies and should offer services on a fully competitive basis.
• Voluntary exit: Customers should be able to go elsewhere for services, after appropriate notice to the service provider.
• Unsubsidized full cost recovery: Operations should be self-sustaining, with fees established to recover full costs as defined by federal accounting standards.
• Surge capacity: Resources to provide for capital investments and peak business demand should be available.
• FTE accounting: Staffing should be accounted for consistent with the Federal Workforce Restructuring Act and OMB circulars.
• Initial capitalization: The organization should support enough staff to meet initial projected commitments.
• Flexibility: Operations should maintain the ability to adjust capacity and resources up or down, as business volume or other conditions dictate.
• Cessation of activity: Service providers should give reasonable notice when curtail-
  ing or eliminating service.
• Organization: Operations should maintain a clearly defined structure with separately identifiable units for accumulating and reporting costs and revenues, without commingling with another organization.
• Services: Only common administrative support services should be provided.
• Performance measures: Comprehensive performance measures should be used to assess each service provided.
• Benchmarks: Organizations should maintain and evaluate cost and performance benchmarks against competitors.

  These principles are also included in the OMB Circular A-76 Revised Supplemental Handbook of March 1996, which applies to all activities of the federal government that are subject to public-public and public-private competition.

Facing Competition

Several agencies long have marketed their support services to other federal customers. Two prime examples are USDA's 25-year-old National Finance Center (NFC) and the Office of Personnel Management's Federal Executive Institute, now in its 30th year of operation. But both operations like the NFC, which specializes in payroll processing, and the FEI, which offers executive training, have faced competition from within and outside the government.

The NFC competes with similar operations at the General Services Administration and Interior to serve civilian agencies. And on the Defense side, competition for payroll services may be about to heat up. The Defense Finance and Accounting Service is scheduled to complete several A-76 studies next month, and could end up outsourcing some of its services to private firms.

The Federal Executive Institute has had competition from both for-profit and non-profit organizations since its inception. Graduate schools of public administration, such as Princeton University's Woodrow Wilson School of Public and International Affairs, Syracuse University's Maxwell School of Citizenship and Public Affairs, and Harvard's John F. Kennedy School of Government, have offered training for federal executives, often with private-sector students in the same classes.

Other traditional cross-servicing operations also are facing more competitive pressure, including some of the more than 20 Cooperative Administrative Support Units (CASUs) in cities around the country. The CASUs were formed to help reduce the duplicative overhead costs in cities with many different federal offices. They provide combined copying services and other support functions for all agencies in an area, with a lead agency coordinating the effort and receiving reimbursement from each agency for services received. But now, about half the CASUs have been converted into business units within franchise funds, meaning they will have to compete against private firms to offer their services.

New entries in the government services derby include two organizations offering the entire range of administrative services: the Central Intelligence Agency, which recently received legislative authority for a working capital fund patterned after the franchise funds, and the Treasury Department's Bureau of the Public Debt, whose administrative organization has recently been added as a business operating unit of the Treasury franchise fund. The Federal Aviation Administration, also operating under legislation patterned after the franchise funds, offers payroll, accounting and travel support, plus specialized training.

Another growing source of competition for federal support-services operations are formerly federal organizations that have been restructured as private companies operated under employee stock ownership plans (ESOPs). The first federal operation to be converted to an ESOP was U.S. Investigative Services Inc., which until two years ago was an OPM unit handling personnel background investigations for agencies. USIS officials say business is booming, and they have given employees, many of whom are former federal workers, large bonuses. As part of its startup commitment, OPM promised USIS three years of continued federal background investigative business.

Now a second ESOP is operating: Synectics AMEC, formerly the Army Management Engineering College. Synectics AMEC has a 1998 course catalog offering most of the same courses previously taught by the Army, plus an added curriculum on implementing the 1993 Government Performance and Results Act.

With all these choices, improved service and lower costs, one might guess that everyone is thrilled with the new more competitive environment for administrative services. But that's not necessarily so. Competition means risk, for buyers and even more for sellers.

Buyers-and Sellers-Beware

Many program managers complain that their agencies haven't yet given them control over funds for administrative services. Even when they do control the money, they're often pressured to spend it within their own agencies, if possible.

Another problem is the lack of comprehensive information on service providers. GSA provides an online directory of reimbursable services, but many of the newer reimbursable organizations have not yet sought to be listed. The Treasury Department's internal CFO Council is conducting a survey to identify all federal reimbursable support organizations. There is no equivalent source of information for all the private-sector alternatives. Competitors, public and private, do advertise (some in this magazine) and provide marketing materials directly or at conferences.

Even when full information is available to buyers, some sellers are concerned that the rules of competition are unfair. An issue of great concern is full cost accounting. Many commercial firms have complained that their federal competitors are able to hide costs when they bid.

OMB Circular A-76 requires adjustments for public-private competition to be sure the total cost to the taxpayer (not just the offering agency) is compared to the total costs (including the need to pay taxes) for a commercial enterprise. Pilot franchise organizations, particularly at Treasury and Veterans Affairs, have been developing full cost analyses for the business units in their funds. The CIA is using activity-based costing to calculate the full costs of its business operations.

Federal operations selling services had the additional advantage, until last October, of a temporary shelter allowing them to sign interagency agreements without going through the A-76 review and competitive process. Agency operations also have been able to boast that using their services will spare their federal clients the time-consuming and onerous process of procuring services competitively in the open market. That advantage is slipping away, because procurement reforms have enabled NASA, GSA, DoD, VA and others to establish governmentwide contracts against which agencies can issue individual task orders to obtain commercial help.

Freedom from Competition

OMB attempted to address the new environment for procurement of support services in its 1996 revisions of Circular A-76. The revisions changed the previous "either-or" dynamic, in which an agency's choices for support services involved having their own employees do the work or buying services from a private firm. The circular now addresses a third option, under which agencies would purchase services from another federal operation.

Administration officials say the new circular better addresses the options agencies face today. They cite active Defense Department A-76 cost-comparison studies as evidence that agencies are taking seriously their obligation to get services at the lowest possible cost. However, among civilian agencies there has been diminishing use of A-76 studies over the past decade, to the point that during fiscal 1997 no civilian agency was doing a study, according to the General Accounting Office.

Even if A-76 competitions were expanded, many private firms don't think they should have to compete against government entrepreneurs to win agencies' business. They have the support of several members of Congress.

Earlier this legislative session, Sen. Craig Thomas, R-Wyo., and Rep. John J. Duncan Jr., R-Tenn., reintroduced their Freedom from Government Competition Act, which sought to prevent agencies from providing "commercial services," a term that could cover support services and much more, from renting out cabins at national parks to operating research and development laboratories.

The proposed legislation won the support of the Coalition for Taxpayer Value, organized under the auspices of the U.S. Chamber of Commerce. But the Clinton administration and federal employee unions opposed the bill.

In March, G. Edward DeSeve, OMB's acting deputy director for management, listed seven principles the legislation would need to incorporate in order to gain administration support:

• The government could choose the public or private source that was most cost-effective and in the best interest of the taxpayer.
• Legislation should not increase the involvement of the courts in reviewing decisions on whether to outsource.
• Management documentation, employee participation, costing and source selection rules for competition must be well understood so as to be enforceable and impartial.
• Source selection processes must permit efficient and effective competitions between public and private offerors for work presently being performed by the government or by a private contractor.
• When an activity currently being performed in-house is put up for bid, employees must get an opportunity to compete to retain the work.
• Legislation should not impede agencies' management improvement initiatives.
• Competition should not be treated as independent from other reinvention and management improvement efforts.

The new measure would simply require agencies to create lists of services that could be performed by private firms. The lists would be made public through announcements in the Federal Register. The bill instructs agency heads to review the lists annually to determine if the programs should be outsourced.

Regardless of what happens with the legislation, it's clear that in the future, federal managers will increasingly be looking outside their own agencies for a wide variety of administrative services. The era of competition-and, in theory, lower prices and better services-is at hand. The manager's job is to learn how to take advantage of this new world.

Michael D. Serlin is a consultant on government change. He was the financial management team leader for the National Performance Review, and retired from the Treasury Department in 1994 after 36 years of federal service.