Savings Can Have a High Price

he current rage in the federal government is to contract out as many functions as possible to save money. The result might be savings, although that isn't always the case, but the concept ignores government's primary requisites-to be effective and efficient. In war, for example, it's useless to lose at half the cost it would have taken to win.

In the high-tech world of defense, decisions about what functions to contract out and what to retain as inherently governmental should be considered carefully. But in this post-Cold War era of downsizing, contracting out has become the preferred solution. While downsizing is a clear necessity and contracting out is a useful and key element in the process, caution is in order.

Not Always a Savings

Public-private competitions are a primary strategy of the Pentagon's Defense Reform Initiative to reduce defense infrastructure costs. But some say DoD is too confident that outsourcing saves money. Depot managers believe contractors low-ball their bids in order to get the work and raise their prices once the competition is eliminated, says Federal Managers Association President Michael Styles.

Managers at 21 Defense depots around the country are protesting an outsourcing initiative aimed at putting 220,000 civilian jobs up for competition with private firms. The services' headquarters told managers to tap more jobs for possible outsourcing this year.

Managers are concerned DoD is jeopardizing its ability to meet its national security mission, Styles says. "The manner in which the commercial activity inventories are being conducted does not instill great confidence in us that efficiency is the paramount goal of this effort," Styles wrote in a letter to Defense Secretary William Cohen.

"There's definitely a misperception that privatization and outsourcing are going to arbitrarily save you a large amount of money," says Patricia Armstrong, a management analyst at the Naval Aviation Depot in Cherry Point, N.C. "Private industry is in business to make a profit. Outsourcing is not always the best deal."

In fact, federal employees recently beat private contractors in a competition for depot maintenance work at a closing Air Force base in California because they could perform the work cheaper. Pending the result of a contractor protest, Ogden Air Logistics Center in Utah won the nine-year, $1.1 billion contract for depot work from Sacramento Air Logistics Center. Over nine years, savings will total $638 million, says Darleen Druyun, Air Force principal deputy assistant secretary for acquisition and management.

In the technically complex world of defense, the inherently governmental functions encompass more than just policy decisions about force structure and missions. They require three key elements: Government employees who can understand military problems in technical terms, who know someone potentially capable of solving them and who can recognize valid technical solutions. The government should promote research and development in its laboratories and centers to help employees understand technology that could be used to solve military problems.

The military program managers who deal with the private sector on engineering development need this knowledge to weigh acquisition decisions. The government should keep enough internal work to sustain its technical capability.

The critical and difficult decision is how much internal activity is needed to sustain technical expertise.

Some argue that the government doesn't need such expertise, because research can be done by universities and development by private industry. They suggest the government needs only to know how to write specifications and oversee contracts. It is not quite so simple. Buying a system that will take years to develop and produce--one that your life may depend on--requires people who can reasonably project performance based on their technical understanding. Thus, government oversight requires more than the ability to read monthly contractor progress reports and evaluate expenditure summaries.

Others argue that the government should maintain, in addition to its research and development capability, extensive in-service engineering and repair capability to ensure their availability in the event of war.

Out of Control

Historical evidence proves there are serious consequences when technical capability is lost or technical advice ignored:

• ValuJet lost technical control of its fleet and was grounded after one of its jets crashed in the Florida Everglades in 1996. The company had contracted out all maintenance and lost the ability to recognize its technical troubles. Further, there are reports that the government inspector who monitored ValuJet was not technically qualified.
• NASA decided to go through with the doomed Challenger launch in 1986, despite technical advice to delay it because of cold weather's effects on the space shuttle's O-rings. The decision was managerial, not technical. It was reported that the contractor's regional manager suggested to the engineer who provided the technical advice that the company not appear uncooperative, since the contract was coming up for rebid. Barbara Romzek and Melvin Dubnick, authors of American Public Administration: Politics and the Management of Expectations (MacMillan, 1991), say "there has been a shift in NASA from a system of professional accountability, which emphasizes deference to expertise within the agency, to a management system incorporating bureaucratic accountability."
• The Navy lost its surface-launched missile engineering capability, at least for the short term, in a defense industry shakeout that followed the Cold War. General Dynamics Corp. operated the Navy Industrial Reserve Ordnance Plant in Pomona, Calif., for years. The organization ultimately moved to Tucson, Ariz., after being shifted from General Dynamics to General Electric to Raytheon. Many people who had worked for years building Navy missiles did not relocate.

General Dynamics' move may have been a sound business decision, but the Navy was left to reconstruct a technical capability that had cost the government billions.

Problems can be devastating when an agency that depends on sophisticated technology moves from a technical focus to a contractual and administrative focus--which appears to be happening at DoD. The Defense Department must be careful not to risk losing control of its technical destiny by jumping too quickly at the politically attractive option of contracting out. Alternative airlines are available to the public, but no alternative Defense Department is available to our country. --Brian Friel contributed to this article.

James Colvard spent 30 years in research and development for the Navy and was deputy director for the Office of Personnel Management during the Reagan administration. After leaving government, he became associate director of the Johns Hopkins University Applied Physics Laboratory, and he now teaches at Indiana University.