Nobel Prize-worthy economic theory has lessons worth learning for federal IT

An award-winning economic theory offers insight into three important federal IT trends

Warren Suss is president of Suss Consulting, a federal IT consulting firm headquartered in Jenkintown, Pa.

The thinking of a Nobel Prize-winning economist could help all of us in the federal information technology field deliver better, faster solutions for government workers, warfighters and citizens.

Oliver Williamson, who won the Nobel Prize last year, was one of my professors when I was in grad school. I’ve kept in touch with him over the years because his work on transaction cost economics was one of the handful of things I learned in grad school that is still relevant to my day-to-day work.

Williamson begins with three core concepts that fit our environment well:

  • Uncertainty. In federal IT, changing technologies, user demands and operational environments create uncertainty everywhere we turn.
  • Bounded rationality. There are inherent limits to our ability to write contracts that anticipate all contingencies.
  • Opportunism. In an environment characterized by uncertainty and bounded rationality, players on both sides can behave badly.

We can apply Williamson’s framework to three important federal IT trends: insourcing, the shift to fixed-priced contracting and the breakup of large contracts, which I call segmentation.

Trend 1: Insourcing

Many agencies are offering on-site contractor employees a deal they can’t refuse: Either quit your contractor job and join the government or you’re out of a job altogether.

From Williamson's perspective, insourcing's potential payoff is the ability to save on transaction costs associated with managing large, complex IT projects and operations. Why? Because in the federal IT space, when transaction costs go up, success rates on IT projects go down. And IT has become the primary tool for maximizing the productivity and effectiveness of the federal government.

To achieve insourcing's benefits, we need to go beyond simply giving workers a different ID badge. Instead, we should focus new, insourced resources on improving IT governance. That approach should allow us to respond more rapidly and flexibly to emerging user requirements, achieve the benefits of promising new technologies sooner, move with greater speed and agility to address operational problems, and redirect IT projects in trouble.

Trend 2: The shift from time-and-materials to fixed-price contracts

The challenges of moving to fixed pricing can be addressed with strategies that reduce transaction costs on both the government and industry sides. Unfortunately, many agencies have embraced multiple-award indefinite-delivery, indefinite-quantity contracting without appreciating the importance of providing better data to help industry generate more accurate demand forecasts. Likewise, companies can compete by doing a better, clearer job of defining what they’ll deliver for a fixed price.

Trend 3: The breakup of large IT contracts

Segmentation creates new interfaces between the government and contractors. With more interfaces come more challenges and more chances for opportunistic behavior. The key to success will be improved governance to enable successful interactions among all players. The government also needs to make major progress in governing its fragmented user and IT management communities, and industry must help the government deploy that framework.

If government and industry leaders adopt these lessons from Williamson, the winners will be the federal workers, warfighters and people who rely on technology to help our nation thrive.

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Reader comments

Sun, Apr 25, 2010 Stan Vornovitsky

The argument threading through Oliver Williamson's numerous works is that every organizational structure exists to economize on transaction costs. The article appears to suggest that keeping those "large, complex IT projects and operations" in contractor's hands is inefficient from the transaction-cost standpoint. Applying Williamson's framework to government contracting can then lead to one simple question: Why would those projects EVER be contracted out in the first place? The article also makes an implicit assumption that contracting out is associated with greater transaction costs, which is not at all certain...

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