The Semantics of Outsourcing

he government always seems to come up with intriguing ways of labeling people. The one I like best is "are you essential or nonessential?" Being designated "nonessential" always seemed to me somewhat demeaning.

Now we have a new set of designations that fits well into this tradition. Perhaps we can call them "inherently governmental" and "ripe for competition." The recently passed Federal Activities Inventory Reform Act (FAIR) puts into law what had previously been an Office of Management and Budget requirement. Agencies must list activities that are not inherently governmental and that presumably would be eligible for public-private competitions. In the past, agencies have complied with the OMB requirement on a hit-or-miss basis--more miss than hit. However, now with the law in place, they are taking aggressive action.

Sen. Craig Thomas, R-Wyo., I am sure, would like to have seen much more out of his legislation than just these lists. His Freedom from Competition Act proposal in 1996 would have required the government, with limited exceptions, to purchase all commercial-type goods and services from the private sector.

What finally passed mandates just the first step in this process, that is, defining the universe. While a modest requirement, it's an important first step. Without knowing what possibilities exist, it's difficult to test the potential for change. Moreover, for the first time, the legislation permits appeals on whether or not the lists make sense.

G. Edward DeSeve, OMB's deputy director for management, has been the administration's point man in this lengthy legislative process. It now falls on him and OMB to see that the agencies do a fair job compiling their data.

In DeSeve's view, the legislation is likely to make agencies more serious about the identification process and add precision to their determinations. There may well be differences among the agencies that OMB will have to resolve. For example, the private sector is replete with all types of counselors. Should all government counselors, therefore, be listed? Should an IRS counselor be treated the same as someone at the Education Department providing advice on student loans? Can or should the private sector do both of these jobs? While good guidance exists in the broad parameters of what's inherently governmental, the true test of the legislation will be in details such as these.

'Best Value'

This effort is very much tied to the administration's reform agenda, as DeSeve sees it. "The process of deciding what's inherently governmental and what should be subject to competition is part and parcel of reinvention," he says. "It's the first question in the decision tree: Should the government be doing the work at all?"

To emphasize quality, OMB in 1996 strengthened the link between these competitions and reinvention by adding a "best value" approach to competitive sourcing procedures. "Best value" means that agencies can select the most highly qualified competitor, even if its cost is not lowest. A recent General Accounting Office protest case involving Pemco Aeroplex, an aircraft maintenance firm, challenges the use of best value in these competitions, at least for the Defense Department. DoD, more than any other agency, has been the primary engine for public-private competitions. "Pemco has the potential to change the landscape for Defense Department competitions," says Rand L. Allen, attorney for the Washington law firm, Wiley, Rein & Fieldin.

In reviewing the Pemco Aeroplex case, Allen and his colleague, Phillip H. Harrington, have concluded that there's
just one way to decide Defense competitions and that's by low cost. The basis for their argument is a provision in the fiscal 1987 Defense authorization bill that says DoD must procure goods and services from the private sector when costs are lower than they would be if the department did the work itself. The Defense Department must see that all costs are considered and that the costs are fair and realistic. "Fair and realistic" introduces a new term of art.

The gist of the Pemco protest is that the Air Force violated the regulation by repairing C-130 aircraft in-house without doing a public-private competition. The GAO agreed, but a technicality resulted in their dismissing the protest. In the past, the GAO would review cases only to see if the administration had adhered to established ground rules.It didn't second-guess agency management decisions. With the 1987 provision, the GAO then could challenge the outsourcing decision itself. If Defense in the future uses best value, not low cost, for public-private competitions, its decision has a good chance of being overturned.

Some say there may be ways to get around this constraint. However, if you are in DoD putting competitive sourcing proposals together, or if you are in the private sector bidding on them, low cost and "fair and realistic" cost comparisons are terms you should get to know. One thing is clear: The private sector is expected to perform commercial-type services unless it is more expensive for the government to go that route. It's the law.