The Daniels Decree

sked in May whether the Office of Management and Budget's 500 employees have the knowledge and skills necessary to lead reforms of the government's financial and management practices, OMB Director Mitch Daniels responded candidly: "The answer is, I don't know." So the director began a workforce checkup. If OMB employees are weak in certain areas, then Daniels says he will hire people with the skills OMB is lacking.

As Daniels set about sizing up his own workforce, he ordered executives across government to do the same-and then to figure out how to thin management ranks, connect more effectively with American citizens and better match staff to their organizations' missions. At least one in four federal workers soon will face an even more stark review of their abilities. Daniels wants the work of at least 425,000 federal employees put up for competition with-or directly outsourced to-private-sector companies. These actions will be coordinated at OMB, where Daniels is reasserting leadership on federal workforce issues after the Clinton administration had pushed off that responsibility to Vice President Al Gore's reinventing government office.

Having reassumed power, OMB will be under significant pressure to deliver results. Daniels' plan to shape a federal workforce that is less top-heavy and more competitive stems from promises President Bush made on the campaign trail. "In size and scale, modern government will never resemble what the framers envisioned. In spirit, however, it should always be citizen-centered, always listening and answering directly to the people. That is why I will reduce the number of mid- and senior-level managers in the federal government," Bush said at a campaign stop in Philadelphia last June. "Today, there are hundreds of thousands of full-time federal employees that are performing tasks that could be done by companies in the private sector. I will put as many of these tasks as possible up for competitive bidding. If the private sector can do a better job, the private sector should get the contract."

Start Planning

On May 8, Daniels ordered all executive branch department heads to analyze their workforces to figure out retirement and attrition rates for the next five years, tally seasonal and temporary workers, evaluate employees' skills and determine the supervisor-to-staff ratio of every manager.

The analyses were to be delivered to OMB on June 29. Daniels also instructed agencies to use the analyses to develop restructuring plans to be included in fiscal 2003 budget requests, due to OMB in September. The restructuring plans should cover the next five years and describe expected progress year-by-year. The plans should "identify the specific organizational changes the agency is proposing to reduce the number of managers, reduce organizational layers, reduce the time it takes to make decisions, increase the span of control and redirect positions within the agency to ensure that the largest number of employees possible are in direct service delivery positions that interact with citizens," according to Daniels.

Daniels' order does not include a target for reduction in the government's management ranks, though Bush in his presidential campaign set a goal of reducing the number of federal managers by 40,000. Bush said during the campaign that he intended not to fill the jobs of half of the 80,000 mid- and senior-level federal managers expected to retire in the next eight years. "We don't know what the number is going to be," Daniels said. "We'll let the facts dictate the changes." Daniels also told agencies to use workforce planning, not just attrition, as they seek to cut management layers.

The strategic approach that OMB is mandating-and that many agencies already have undertaken-is a change from the more haphazard workforce management of the 1990s. Then, the goal was simply to cut positions to meet the Clinton administration's aim of eliminating 300,000 jobs. General Accounting Office reviewers say agencies failed to plan the cuts strategically, creating skills and abilities gaps that are causing problems today. Elizabeth Throckmorton, assistant deputy secretary for civilian personnel policy at the Army, contends that most personnel officials spent the 1990s trying to meet downsizing goals without resorting to painful layoffs, so buyouts and other retirement incentives went to qualified employees who volunteered. "It wasn't poor planning. It was compassion," Throckmorton says. Downsizing was tough on agencies, but Daniels' restructuring won't necessarily be pleasant. Some people will be forced to relocate or take on new duties. But restructuring, combined with strategic workforce planning, can create an organization better able to accomplish its mission without leaving workers on the street. Managers and employees at the Internal Revenue Service have firsthand experience with both the pain and promise of such an approach.

Musical Chairs

Congress gave the IRS a strategic direction in the 1998 IRS Reform and Restructuring Act, ordering Commissioner Charles Rossotti to improve service to taxpayers. Rossotti and IRS executives, with support from consulting firm Booz Allen & Hamilton, began a two-year restructuring to turn the agency from a geographically based operation with 33 district offices into a customer-aligned organization with four operating divisions. Each of those divisions focuses on separate groups-individual taxpayers, large- and medium-sized businesses, small businesses, and tax-exempt and government agencies. In the new structure, 11 layers of management were reduced to five, in part by condensing mid-level ranks-division chiefs, assistant division chiefs and branch directors-into a single cadre of territory chiefs. The change cut the number of mid-level managers from 1,750 to 1,500 leaving 250 "excess" managers, and about 200 who were slated to relocate. IRS chief human resources officer Ron Sanders considered how to proceed. "We did not want to run a RIF [reduction in force]. You know the wounds that creates," Sanders says. "We wanted it to be a merit-based process. So we talked to hundreds of managers and posed to them the question, 'How do we do this?' The net result of all of those discussions was some form of competition was the best of all the alternatives."

For the new mid-management cadre, IRS executives developed a list of 21 leadership competencies, including several skills not previously expected of managers. One of the new competencies was adaptability. "We wanted leaders with a high tolerance for ambiguity," says Sanders. "We needed leaders who could come into brand new organizations and make a difference quickly while maintaining current levels of service. In our interviews we asked people to give us examples of where they had done this on the job."

Sanders held workshops across the country to explain the leadership requirements. Then, every mid-level manager was asked to prepare a resume and apply for a management job. "It was a musical chairs exercise, in a way," says Ray Woolner, president of the Professional Managers Association, which helped design the process. "There were not enough chairs left for everyone after the reorganization." Some managers chose not to play, opting instead to take early outs or buyouts. Those who participated could apply for more than one position. IRS executives rated all the applicants against the new leadership competencies as well as some technical, tax-related skills. Then the managers were chosen.

The IRS promised those who were not selected and who did not want to retire that they would be given non-managerial assignments with no reduction in pay or grade. Some were placed in temporary positions until permanent jobs opened up. For many, it was a wrenching experience. "There are still people out there who wanted to continue their management careers but who were not selected," Woolner says. "There are people who would say, 'I was damaged by this reorganization. My job as a branch chief went away and I'm now doing non-managerial work as a staff assistant. I see that as a denigration of my career.' It is a difficult, difficult process for a lot of people. But to its credit, the IRS did the realignment in a way that gave people a soft landing," he adds, noting that no one had to take a lower salary, and no one was forced to move.

IRS workforce planners were on a tight schedule set by the 1998 law, which gave the agency two years to complete its restructuring. While managers were competing for their jobs, IRS workforce analyst Alex Manganaris was running statistical programs to figure out whether all 100,000 IRS employees would fit into the new structure. Because employees at service centers and call centers would go through a separate restructuring, Manganaris homed in on the 65,000 employees who work elsewhere in the agency.

His analysis took into account both the new organizational structure and changing skill requirements, such as a need for more pre-filing assistance for taxpayers, to comply with the 1998 law's call for better service. Manganaris found that 95 percent of employees fit directly into the new organization. He estimated that 4,800 employees didn't match up because their positions were no longer needed. About 1,600 of those could fit easily in new positions, some with modest retraining. He estimated that only 60 employees would have to relocate and 900 employees could be offered buyouts and early retirement. That would leave about 2,300 employees who would need significant retraining.

Officials in the restructuring office used Manganaris' analysis as a guide. Manganaris notes that his estimates were close, but not right on the money. About 3,200 employees, rather than 4,800, didn't easily fit into the new organization. Seven hundred employees took buyouts. But in addition to helping executives predict the effects of the restructuring, the analysis also pointed out where the agency would need to devote training dollars, helping executives justify a $112 million training budget request for fiscal 2002. The IRS is continuing to use workforce planning to guide its human resources strategy, plotting changes for each of the next three fiscal years. Manganaris says it is essential that workforce plans be tied to budgets. "If we're not linked to resources, workforce planning is not going anywhere," he says.

Daniels' direction that workforce plans accompany fiscal 2003 budget submissions means budget requests should reflect the numbers and changes in the workforce plans, and the plans should reflect the realities of the budget. "This is not something you do once and then put it on the shelf," says Mary Ellen Beach, a workforce planning specialist at the Office of Personnel Management.

First, Restructure

Would the IRS restructuring method work elsewhere in government? Sanders emphasizes the importance of assessing and possibly revamping an agency's organizational structure before cutting positions. "If you de-layer by attrition alone, you hollow out your management structure. De-layering needs to be the result of restructuring. You flatten the structure first, and then realign and reduce, so that you can manage the attrition."

Sanders says he wishes the IRS had had more time to reduce layers so managers could have received training in new leadership requirements. Daniels is giving agencies five years to restructure, but only five months to plan. The timeline for developing the plans is unrealistic, says Robert Tobias, director of the Institute for the Study of Policy Implementation at American University. "It's critical to get the information correct and, more importantly, it's critical to have employee acceptance about what the workforce is going to look like in the future," says Tobias, a former president of the National Treasury Employees Union and the representative of employee interests on the IRS oversight board.

Donald Kettl, a public administration professor at the University of Wisconsin, says de-layering should begin with reducing the number of political appointees, but Daniels' guidance does not say which management levels should be targeted for reductions. Kettl also points out that while agencies such as the Federal Aviation Administration, Food and Drug Administration, National Institutes of Health and the Defense Department provide obvious benefits to the American public, most agencies don't interact directly with citizens. Instead, they oversee and interact with complex networks of contractors, state and local governments, grantees and others. Ordering such agencies to redistribute jobs to emphasize direct service delivery isn't appropriate, he says. Kettl also contends that reducing management layers is far less important than making sure agencies have people with the right skills in place. "Any sensible proposal has to begin with a greater effort to connect the government's skills with the job that needs to be done," he says.

The last decade's effort to shrink government offers some cautionary tales for Daniels and the executives trying to carry out his order. In 1994, the Clinton administration ordered agencies to halve the number of management positions in government and to increase the ratio of supervisors to employees from 1-to-7 to 1-to-15. The results varied drastically from agency to agency, but as of 2000, OPM figures showed there were 182,618 federal supervisors and managers for 1,299,517 non-supervisory employees, still one manager for every seven employees in government.

Some agencies only grudgingly complied with the order to reduce the number of managers. Rather than cutting management positions, at least 19 agencies simply re-classified supervisors as team leaders, a 1996 General Accounting Office review found. In theory, team leaders serve as coaches and coordinators for work units, leaving supervisory tasks such as performance evaluation and work assignments to their bosses. In reality, many federal team leaders still are serving as full-fledged supervisors-adding an additional layer of management rather than taking one away. In a Labor Department office, for example, some team leaders are classified as supervisors; some aren't. Some are considered bargaining unit employees; some aren't. Some are responsible for assigning work to employees, while others aren't.

In other offices, managers suddenly found themselves overseeing double or triple the number of employees they oversaw before. A mid-level manager at an independent agency says the Clinton order pushed the supervisory ratio from one supervisor for 12 employees to 1-to-26, with a couple of supervisors overseeing 50 people each. Work backlogs grew, employees filed grievances and communication became more difficult. "Most supervisors had inadequate time to perform any of their numerous responsibilities effectively," the manager says. "If attention was paid to production outcomes, then personnel management had to be reduced or training efforts had to be diminished. Everything became a trade-off as to what was most needed at any given moment."

Citing problems created by Clinton administration downsizing, Didier Trinh, legislative director for the Federal Managers Association, says he is encouraged that OMB is asking agencies to do workforce analyses rather than ordering them to cut an arbitrary number of positions or meet a predetermined supervisory ratio. "You can't have a 'one size fits all' de-layering process for the entire federal government," Trinh says.

Competition Quotas

While Daniels has backed away from a preset goal for managerial cuts, he is sticking to a target of opening for competition at least half of the federal jobs that could be performed by private firms. Since 1999, agencies have been creating annual lists of jobs that are commercial in nature. In March, Daniels' deputy, Sean O'Keefe, instructed agency leaders to open for competition at least 425,000 jobs-one in four federal positions-starting with about 42,000 in 2002.

Luann Kollaja, director of human resources strategy for PricewaterhouseCoopers' Washington office, says federal executives should decide whether to "buy or build" as they look to fill the skills gaps in their workforces. "Do you want to grow, or build, the talent within the agency or do you want to buy, or contract out, for the services?" Kollaja asks. "A strategic decision needs to be made by the leadership of the agency." Last year, the director of the National Security Agency, Air Force Lt. Gen. Michael Hayden, decided that his own workforce could not as efficiently run the agency's nonclassified computer networks as could a private firm. So Hayden offered the work, valued at $5 billion over 10 years, for bid from the private sector. About 1,000 NSA employees will be affected.

Time will be a factor in executives' decisions to buy or build. Competitions at the Defense Department have been taking more than two years to complete, GAO found last year. OMB's deadline for the first 42,000 jobs is pushing some agencies to consider outsourcing work without first conducting public-private competitions. A provision of OMB Circular A-76, which sets the rules for such competitions, offers a loophole through which agencies can contract immediately.

Jacqueline Simon, director of public policy for the American Federation of Government Employees, says direct contracting will defeat the purpose of Bush's competition initiative. "We know federal salaries are cheaper than private-sector salaries. In the public sector, work is done on a not-for-profit basis. We don't have to pay corporate executive salaries," Simon says. "You don't contract out without first at least competing."

The push for competition and outsourcing may end up involving even more than 425,000 jobs. O'Keefe in April asked agencies to send OMB lists of jobs they deem inherently governmental. Administration officials want to review these classifications to see whether any of the jobs could be eligible for competition or outsourcing. OMB may push agencies to re-classify such jobs and add them to the competition target list.

At some agencies, competition won't be coming just from the private sector. At the behest of Health and Human Services Secretary Tommy Thompson, HHS human resources chief Evelyn White and other executives are looking out across the HHS workforce to identify people who are performing similar work in administrative functions, such as HR and technology, and programmatic functions, such as preventive health care. Thompson is pushing a "One Department" initiative in which such functions would be consolidated, forcing competition for the jobs in the newly centralized organizations.

Demographic Forces

Competition or no, many federal employees already may be on their way to the private sector. From 2001 to 2005, about 281,000 federal workers are expected to retire, many of them still young enough to continue working after their government careers end. The numbers are not significantly different from retirement losses during the downsizing years. About 308,000 people retired from 1993 to 1997, according to OPM figures. The difference now is that agencies aren't required to ax positions as people leave.

Even with the Bush administration's push to contain government growth, federal human resources officials are focusing on recruitment. Personnel experts are relying on mega-computer programs to analyze the Army's 216,000 civilian workers and develop hiring plans. Engin Crosby, systems manager for analysis and forecasting, is the Army's power workforce number cruncher. She uses an analytical tool containing 25 years of data on 8.1 million people who have worked for the service, as well as a forecasting tool that looks into the future in seven-year increments.

Crosby tries to divine how many employees the service needs to hire each year to replace losses through various forms of attrition. Typically, the Army hires 17,000 civilians a year. Because of a retirement bulge in coming years, Crosby's forecasting tool predicts the Army will need to increase annual hiring by about 8,000 people-up to 25,000 new hires a year. "That is not a crisis," Crosby says, particularly since the service knows what it needs to do. "If you don't know how you're going to be impacted, you're going to be caught by surprise. You could break the mission."

The Army has filled many of its positions in recent years by hiring people already working in government. Now, civilian officials are developing a marketing campaign aimed at potential civilian workers. "We haven't had practice in building a recruiting and advertising program, but we'll be ready by 2003," says Army human resources chief Throckmorton. "We're developing an Army civilian brand that says, 'Come to work with the Army. We have wonderful missions.' People don't realize all that civilians do in the Army."

At Health and Human Services, about 14 percent of the 56,000-person workforce will retire by 2006, according to a GAO estimate. HHS human resources chief White says the agency will be looking for new employees with strong analytical skills currently lacking in the workforce. The department also needs to hire nurses, doctors and other much-in-demand health professionals.

Both Throckmorton and White see federal civil service rules as an impediment to their recruitment efforts. They both advocate regulatory and legislative changes that could make hiring faster-the Army takes about 90 days to fill positions on average, Throckmorton estimates. On-the-spot hiring authority would help speed up the average hiring time, White says. Both would like to use broad-banding for classification, rather than the strict occupational series and grade-and-step setup of the General Schedule system. Broad-banding simplifies the 15-grade, 10-steps-per-grade General Schedule into four or fewer pay bands, allowing agencies to quickly create positions without classifying them on a strict scale. Not everyone agrees such steps are necessary. An OPM official contends that it is agencies' own arduous practices, rather than governmentwide rules, that make it tough for managers to hire people quickly.

Regardless of who is right, the coming retirement bulge and recruitment binge, coupled with Daniels' orders to cut management layers and increase competition, mean that workforce planning is likely to gain much more attention from top agency officials than it has heretofore enjoyed. Those forces also mean that all federal managers will be looking at their workforces in the same way Daniels is looking at OMB's staff-with an eye to determining whether the right people with the right skills are in place to do the agency's work today and in the future.

"In the old days, federal agencies would run a reduction in force to get rid of old skills and hire new skills," HHS' White says. "Now we have the opportunity to see where we are going to incur losses (including retirements), retrain the workforce and then hire new skills. The message to the employees will be for them to help us move in that direction. We will give them an opportunity to learn the new skill sets. Will employees be doing the same work three to five years from now that they are doing today? Chances are the answer would be no. But will they be gainfully employed? The answer is yes."