The Company Goes Commercial

wo years ago, the Central Intelligence Agency used 26 shipments a year to transport materiel needed by its operatives stationed abroad. Today, the number is down to 13, although the volume of cargo has not diminished appreciably. And the agency has found room to include goods for other agencies in the shipments. At the same time, CIA managers are encouraged to use other, more economical shipping methods-including private delivery services-if they can do so without compromising national security.

The agency's Central Warehouse is now a hotbed of entrepreneurial activity, as managers there look for opportunities to sell their special capabilities to internal and external customers. "We offer secure destruction for sensitive equipment ... rendering it unusable and unrecognizable," says a marketing brochure for one warehouse service. Another group at the warehouse is capitalizing on its financial management expertise, selling services to CIA offices that aren't big enough to justify full-time financial staffs.

CIA drivers are now hauling sensitive materials for another government agency, at considerable savings to the government. The drivers have security clearances and trucks with state-of-the-art Global Positioning System tracking systems, enabling them to operate without the guards and chase cars the other agency had to deploy. Fees collected from the other agency support the costs of the CIA transport operation, and reduce unit costs for the agency's internal customers.

And in the wake of last summer's bombings of U.S. embassies in Kenya and Tanzania, the agency's Transportation Service Center is seeing increased demand for its expertise in equipping cars with weapons-resistant armor.

Richard D. Calder, who is pushing the creation of such business activities as head of the agency's Directorate of Administration, emphasizes his tolerance for risk and failure as managers experiment with initiatives far outside the boundaries of tradition in the closed world of intelligence. The armored car entrepreneur, says Calder, found his operation mired in red ink for many months. G. Edward DeSeve, then deputy director for management at the Office of Management and Budget, became aware of the losses the operation was running, but decided the risk not only was justified, but would provide a good example for other government managers to follow.

The CIA is just one of many agencies in which managers are taking advantage of legislation enacted in the mid-1990s to set up businesslike operations (often called "franchises") to sell services to other offices in their own agency and in other departments. New incentives have quickly emerged in these operations. For example, a manager of one of the CIA's franchise operations complained to Calder that his cost of doing business, and thus the prices he could charge, were inflated because his organization had too many supervisors. His request for relief was remarkable in a government where status is usually measured by how many, not how few, people one commands. Calder readily agreed to find work elsewhere in the agency for the surplus supervisors.

Recently, Calder convened a large group of people who work in the Directorate of Administration to listen to a one-hour lecture by one of their colleagues on the mistakes she had made in undertaking one of these new entrepreneurial ventures in the agency. "How many times do you find government employees admitting a single mistake, let alone a list of mistakes?" he asks.

Calder is so excited by his efforts to bring businesslike processes to the CIA that he has taken unprecedented steps to inform others in government, breaking the veil of secrecy that often covers even the most routine CIA initiatives. And indeed, the CIA's experience can be instructive to other agencies inside and outside the realm of national security affairs.

Changing Incentives

Calder is motivated by more than just the bureaucratic challenge of bringing a more businesslike culture to the CIA. Stark budget realities are driving the change as well. The CIA has not been immune to downsizing pressures affecting all national security agencies in the 1990s. Calder's own directorate has lost about a third of its staff in the past few years.

Senior staff in the CIA's other directorates-Operations, Intelligence and Science and Technology-have not always been willing to participate in money-saving programs. Their life-and-death missions demand a timeliness and quality of products and services, and they have found it difficult to tolerate changes that might bring delays in the provision of what they need to get their jobs done. Until recently, they had been accustomed to thinking of support systems-personnel, travel, supplies and the like-as the Directorate of Administration's problem.

Moreover, these consumers of administrative services were accustomed to thinking of them as "free." Their own budgets didn't include line items for these costs. As economics students learn, where goods are free, there is no natural constraint on demand. So what if it cost more to ship goods using government employees and equipment, instead of using private services? It wasn't their money or their problem.

So the impetus for reforms had to come from within the Administration Directorate itself. And it was Calder who got the ball rolling.

Calder was named to head the directorate in 1995. He had spent more than two decades in CIA operations, and brought to his new job a keen understanding of the directorate's customers. He understood their needs and their incentives, which were focused on getting their jobs done with little regard for cost. His challenge was to bring more cost-consciousness and greater efficiency to agency administrative operations.

Calder was not himself deeply schooled in business management, having earned an undergraduate degree from the University of Connecticut in political science and government and a master's from The George Washington University in information systems. But he knew reforms would have the best chance of succeeding if they were based on market incentives of the kind found in private business. So he set about his attempt to change incentives in the 50-year-old agency using business planning and such financial management tools as activity-based costing and a working capital fund to establish entrepreneurial outposts within his directorate. He also hired the consulting firm PricewaterhouseCoopers to give his operation access to experts on the use of business tools in the government context.

Changing incentives at the agency, Calder realized, meant making people more sensitive to costs. There were two sides to that equation:

• Suppliers of services would have to learn to count their own costs as the key step to evaluating ways to do business more efficiently.
• Consumers of these services would have to be given direct responsibility for spending the sums needed to secure the services they required.

In the first instance, activity-based costing was the key. Few people in government know how much of the taxpayers' dollars they're spending to provide the services or goods for which they're responsible. This information simply hasn't been needed in an environment where operations are financed by annual, centralized agency budgets. And it's information that's difficult to assemble, since policies typically don't exist for allocating overhead (such as the salaries of bosses up the line), accounting for ongoing capital investments (such as trucks or technology systems), or establishing unit costs. But these sorts of questions are possible to address, and were addressed by the PricewaterhouseCoopers consultants as they examined various CIA administrative operations.

On the consumer side of the equation, the answer was to make managers in CIA operations and intelligence pay for the administrative services they wanted. Thus, if a hypothetical Office of Cloak and Dagger ordered up crating and shipping services worth $1 million in 1998, it would get that same amount in 1999. If the office was able to make do with less of the services (or, perhaps, buy cheaper services from non-agency suppliers), it could devote the savings to mission goals-thus shifting money from tail to tooth, in military parlance.

These two key reforms have been mutually reinforcing. Activity-based costing has given suppliers of services the tools to achieve efficiencies demanded by their customers, who in some instances now can go outside the agency to get competitive bids. Some of the suppliers, moreover, have gone into business selling their wares to buyers elsewhere in government-joining the roster of franchises operating on an interagency basis. Congress granted the CIA the authority to set up franchise operations in the 1998 Intelligence Authorization Act (PL 105-107), which also established the agency's Central Services Working Capital Fund. The program was patterned on the franchising provisions of the Government Management Reform Act of 1994, under which civilian agencies have established cross-servicing operations which must be self-sustaining in a competitive environment.

The Company Store

For people in the three line directorates of "The Company," as the CIA is often called, the Directorate of Administration was in effect the company store. It was a store that substituted procedures for prices and thus did little to discourage high demand for its wares. As budgets tightened in the 1990s, however, the directorate had trouble meeting the demand, in part because it was suffering deep staff reductions.

In 1994, the directorate instituted a charge-back system for its services. Predictably, the captive customers resented the change. They didn't like being billed, thought costs were too high and believed services were being reduced. That was the situation when Calder took the helm at the Administration Directorate in late 1995.

Calder responded by forming a Business Transformation Office in October 1996. It established a process for administrative entities to determine the price of their products, benchmark against similar service providers, develop business and marketing plans, and ultimately gain approval to function as business enterprises.

Calder also hired Pricewaterhouse-Coopers in 1996 to help determine costs of products and services and establish business planning processes. The firm had extensive experience in devising cost systems and strategic plans for such federal clients as the Navy, the Internal Revenue Service and the Immigration and Naturalization Service. But Ian Littman, the partner managing the project, says the CIA effort differed from the others in that PwC was asked to analyze the agency's products, services, costs and potential demand in an environment of customer choice. In effect, the firm was helping to design a start-up business plan, and Littman's public sector consultants turned to the commercial practices side of PwC for current techniques used in such planning in the private sector.

By the spring 1997, business planning was advanced enough to alert key House and Senate staffers about the agency's plans for changing to a more businesslike approach. These conversations culminated in enactment the next year of the CIA's working capital fund legislation. Working capital funds permit using income from customers not only to finance current operations but also to accumulate savings for major capital investments. Such funds can carry over from year to year without annual appropriations.

Today, following a rigorous review process that requires detailed comment from customer groups throughout the agency and approval from senior agency leadership, four enterprises are operating as businesses:

• The CIA's transportation and storage facility, also known as the Central Warehouse.
• The agency's telephone service provider.
• The Transportation Service Center, which offers motor pool and package delivery services.
• A software development enterprise specializing in Web development, Lotus Notes and relational databases.

Four other major lines of business are being readied for franchise operation later this year: space management, printing and photography, travel services, and training and education.

Warehouse Transformation

The Central Warehouse was chosen to pilot-test the new approach because it had developed a business plan and understood its core competencies. In fact, the warehouse had already won a number of quality commendations, including two of Vice President Al Gore's reinvention Hammer Awards.

The Central Warehouse began by querying its customers to determine what services they really needed. Having long been served with "free" goods, the customers responded that they needed most everything they were used to getting. For example, customers deemed their bimonthly materiel shipments an absolute necessity.

The Central Warehouse then became the first CIA service provider ever to attach specific prices to its products and services. It began benchmarking against similar businesses to determine competitive strengths and weaknesses, to develop strategic partnerships and to learn from others' successes. Ultimately, reducing internal costs became the real issue in determining the success of Central Warehouse offerings.

Leaders of the Central Warehouse developed a marketing and sales strategy that concentrated first on the agency's directorates and components, then the broader intelligence community. They determined they could segment their markets, providing separate modes of shipping for sensitive, classified and unclassified material. Warehouse leaders pledged to win back internal agency customers who had increasingly chosen alternative shipping means for unclassified or lightly classified materials. Customers needing overnight delivery, for example, often thought that FedEx or UPS provided more reliable guarantees than agency shipping services-consigning to the latter items of relatively low priority.

The warehouse can use internal agency means to promote its services to CIA customers, but in addition it has launched an aggressive customer outreach program, stressing reliability, security, flexibility, ease of service and time-definite delivery capabilities. Its slogan-"Doing Business Like Business"-suggests that it sees its competition as being in the private sector. And while that is certainly true of some services, others are more government-specific, as with its offering of secure destruction for sensitive equipment.

Throughout the development process, the Central Warehouse participated in periodic reviews with the senior management of the Directorate of Administration and the staff of the Business Transformation Office. Before its rollout, the Central Warehouse gained the approval of the CIA's Resource Board, chaired by the agency's executive director, with participation from the agency comptroller, the four deputy directors (of Administration, Operations, Intelligence and Science and Technology), the general counsel and the head of congressional affairs. After these key internal officials endorsed the new approach, the CIA got OMB's approval and informed the appropriate congressional committees of the changes.

More Money to Mission

During the year the Central Warehouse has operated as a business, it has changed attitudes and business practices in its own workforce and throughout its customer base. As a working capital fund entity, the warehouse gave appropriations it had been receiving from Congress back to its customers. Those appropriations included not only the direct costs of the services the warehouse had been providing, but also funds to account for the costs of overhead in the Administration Directorate and Central Warehouse employee salaries.

Once customers were told they had to spend their own money, their behavior changed significantly. The very same organizations who had said they could operate with no fewer than 26 materiel shipments per year now discovered they needed about half that many. The consolidation of shipments saved customers $6 million in the first year that they could use for other purposes.

The Central Warehouse has succeeded in extending its franchise outside the confines of the CIA. L.J. Roberts, chief of material management for the National Imagery and Mapping Agency, shopped around for services he needed because he was facing reductions in his staff. He found that the Central Warehouse could meet his needs at the lowest cost to the taxpayer.

The Agency for International Development is among several agencies that employ the CIA's Transportation Service Center to armor automobiles for security purposes. "The CIA has been very responsive in the work we have given them for vehicles we will be using overseas," says David Blackshaw, chief of AID's Regional Security Support Branch. "I feel very comfortable with their high motivation and commitment to assuring quality control."

An important benefit of such external business for the CIA is to spread total costs more widely, thus cutting unit costs of services to internal consumers. "The business model is accomplishing its intended objectives-driving dollars back into mission, while adding value where the customer actually wants it," says Calder. Across its new businesses, reductions in service demand have been as high as 50 percent and the Administration Directorate has reduced its staffing significantly through early retirement, reorganization and attrition.

Culture Change

Skeptics within the CIA have looked askance at Calder's efforts, with especially strong doubts coming from the Directorate of Operations, the espionage component of the agency. Operations managers, focused sharply on difficult and often dangerous work, often considered choosing alternatives for spending support money a distraction rather than a benefit. "Throughout the agency, there was sticker shock when formerly 'free' services were fully priced," says Barbara Falgout, director of the Business Transformation Office.

While the first year of actual experience has resulted in substantial rebates, which managers in the Operations Directorate have been able to redirect to mission areas, fears persist that the situation could change-that Congress or higher executive branch officials might decide to use the savings for other purposes. CIA Comptroller Mary Sturtevant, a 15-year veteran of the agency and the Senate staff dealing with the intelligence community, considers such concerns to be exaggerated. Managers must realize that the days of limitless budgets are gone, she says, and that it's in their best interests to take control of administrative funds that were previously in centralized accounts.

As a longtime executive in the Operations Directorate, Calder understands the attitudes of operations managers. "As we began adjusting to this post Cold War environment, mission managers were willing to see support-the Administration Directorate-take the bulk of the budget cuts," Calder says. "Yet, when crisis issues develop, we have to be there-we are the enablers. So we have to have a conversation about what it is that they, as customers, really need from us.

"A year into it, what we are finding, despite the initial resistance, is that many of the same customers who once said 'Cost doesn't matter, we need the service,' are now saying 'Hey, why does this cost so much? Can we find a better way of doing this?' "

The Directorate of Intelligence, responsible for the analysis and production of finished intelligence, has been quicker to accept the new administrative approach. The deputy director of support services for the Intelligence Directorate says most managers support the changes in theory, but are carefully monitoring each enterprise as it makes the transition to the new business model to ensure that their needs are met.

The business transformation has made Intelligence Directorate managers more cost-conscious, and the directorate has been able to cut down on use of the agency's crating and shipping services, redirecting the savings into mission uses. However, other enterprises, such as telephone services and transportation services, have required reallocation of mission funds to meet support requirements. The deputy director of support services anticipates that Intelligence Directorate offices are likely to buy services externally for some of their training and unclassified printing needs. She adds that many of the issues are transitional in nature and likely will be resolved as the intelligence and administration directorates develop more experience in the new working capital fund environment.

Moving Ahead

Within his own directorate, Calder meets monthly with each enterprise manager, quarterly with the enterprise managers as a group and holds bimonthly town meetings with employees to discuss the ongoing transformation. He also holds periodic meetings with the other directorates to explain the need for change, the components of a competitive marketplace, the progress that has been made, and to listen to concerns of customers and his own staff that might call for corrective action.

Such mid-course corrections may be painful. As one senior Administrations Directorate employee says, "We must acknowledge where we're non-competitive." The rigorous review process is aimed at identifying such problems before a new enterprise enters competition, but the response of the customers will ultimately determine the outcome. If a new franchising operation actually goes out of business, and people lose their jobs, that will demonstrate that a true revolution is at hand.

Cathy Eberwein of the House Permanent Select Committee on Intelligence staff is encouraged by the initial success of the business model. "The administrative dollars saved are real and are being spent on mission," she says. Eberwein also cites an initial audit of the working capital fund and the recent findings of the CIA inspector general indicating the business transformation is beginning to achieve its objectives.

Calder says he's only a tenth of the way down the road to the full business transformation of his directorate. That's a view shared by a customer in the Directorate of Operations, who says that mission managers need a better understanding of the new approach. To go the rest of the way will require years of work to organize new businesslike ventures, to overcome continuing skepticism in the agency, and to create a new cost-conscious and entrepreneurial culture. Calder and his top lieutenants know that in the private sector, businesses thrive when overhead is kept low, and they are determined to apply that lesson within the closed world of intelligence as well.

Michael D. Serlin is a consultant on governmental 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.