Private sector gets into the game

Agencies warming up to outsourcing, but need to understand the challenges

As more and more agencies consider the move to centers of excellence under the Office of Management and Budget’s Lines of Business initiatives for human resources and financial management, some are finding the private sector a viable alternative.

The Small Business Administration, for example, was ahead of the game when it turned over the back-office functions of its financial management system to Corio Inc. (since bought by IBM Corp.) almost three years ago. The move not only freed up time and money for the small agency, but it also let SBA workers focus on the agency’s mission.

“SBA’s entire focus is toward delivering mission-specific results, and hosting a data center for our financial management doesn’t really fit with that,” said Stephen Galvan, SBA’s chief of staff and chief operating officer.

Under the LOB initiatives, agencies are encouraged to sign up with public-sector COEs or their private-sector counterparts for certain back-office functions common to all government agencies, such as HR and financial management.

The administration clearly wants agencies to consider all their options as they perform their due diligence.

“We’re not advocating outsourcing, but rather a thorough analysis as to the best means of providing these functions on a governmentwide basis,” said Tim Young, OMB’s associate administrator for e-government and IT.

Other agencies, such as the Transportation Security Administration and the National Endowment for the Humanities, also have teamed up with the private sector for human resources and financial management services, respectively, providing examples of OMB’s goal of money saved and work enhanced.

“We want improved focus on agency core missions,” Young said.

Before agencies jump to the private sector, there are several aspects to consider, government and industry experts say.

First, agencies must have an open mind and not assume that the private sector, a public provider, or retaining these functions in house is the best way of moving forward.

“Look at the options the COE has, and don’t try to use how you do things today as an excuse for not moving forward,” Galvan said. “You’ve got to really be open for adopting new and efficient ways.”

Agencies also should take stock of their needs and whether the functions are critical to their mission, said Alan Webber, senior analyst at Forrester Research Inc. of Cambridge, Mass.

He said agencies should ask a series of questions before going to the private sector.

“What is the net effect you expect from this? How well is this going to improve the mission of your agency? How easy is it going to be for me to work with this person and this entity? It may take a huge effort to outsource, and it may not be worth it,” Webber said.

If an agency selects a private-sector company, they would do well to sign performance-based contracts with built-in mechanisms that let the agency constantly review the contractor’s performance, experts say.

“The contract needs to have some teeth and consequences for poor performance,” said Brian Andrew, senior director of the public sector division at Convergys Corp. of Cincinnati. Convergys runs the bulk of Florida’s back-office HR functions.

SBA signed a five-year, fixed-price contract in July 2003 with enterprise application management provider Corio to host the administrative nuts and bolts of SBA’s financial accounting system.

Galvan estimated that if these responsibilities were retained in-house, the agency’s costs could double and its workforce would be less efficient. SBA officials said it is paying IBM Global Services between $400,000 and $500,000 a year, and it is saving or avoiding costs of about $1 million a year.

That does not mean, of course, that outsourcing is right for everyone.

The Equal Employment Opportunity Commission did not even consider the private sector when it re-upped with the Interior Department’s National Business Center for financial management services earlier this month.

Under an 18-month base contract with five one-year options, which could be worth $11.7 million, EEOC will receive full accounting services and other services, and the accounting system will be able to accept all procurement and human resource data from other systems.

While plenty of private-sector vendors could provide those services, EEOC said it could find none that provided the interfaces it needs with Bank of America for their travel and purchase information.

“Nobody in the private sector is doing this, and no one expressed interest, either,” said Jeff Smith, EEOC chief financial officer.

There are also labor issues, as highlighted in a mid-March congressional hearing.

During the hearing, Rep. Todd Platts (R-Pa.) questioned whether having private COEs would bring changes to OMB Circular A-76, which details how agencies should compete inherently commercial tasks against the private sector.

While OMB has yet to publicly respond, Young said the administration is developing a competitive framework, based largely on A-76.

Now that the ball is rolling, analysts don’t expect the government—even with a new administration in 2008—to walk away from OMB’s initiatives.

“There has been a lot of momentum for this over the past six or seven years,” said Andrew Robinson, senior vice president for Information and Program Management at ICF Consulting of Fairfax, Va. “The pendulum has swung over to the side that this is the politically smart way to go.”

GCN assistant managing editor Jason Miller contributed to this report.

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