Government Inc.

Policy-makers have worked hard to make the federal government run more like a business, but how far can they go?

In recent decades, government leaders have tried to make government run more like a business and less like a bureaucracy. The Bush administration adopted a management agenda that rewarded agencies for business practices borrowed from the corporate world. The leaders’ ideas about entrepreneurial government gave new meaning to the term public service.

Few policy experts agree, however, on whether the Bush administration has been successful at transforming the federal government into a businesslike enterprise. Major transformations do not occur in just one or two presidential terms, most organizational experts say. But some — including a number who have been the staunchest advocates of the President’s Management Agenda — say they now doubt whether initiatives such as performance-based pay and business consolidation will achieve the objectives that they had wanted.

Many see limitations to how far the administration can go with business-oriented initiatives focused on customer service, procurement reforms and job outsourcing.

When the Bush administration took office in January 2001, “I think a lot of people came in thinking a lot of things would translate, and then a lot of them changed their minds,” said Renee Courtland, a former senior political aide and policy analyst in the Office of Federal Procurement Policy. She is now a senior associate at Dutko Government Markets, a lobbying and marketing company.

The idea of transforming the federal government into Government Inc. didn’t begin with the Bush administration. The Clinton administration based its National Performance Review on similar ideas about improving government performance and efficiency. In a 1999 paper, a University of Nebraska professor, Richard Box, described the situation. “The public sector faces increasing demands to run government like a business, importing private-sector concepts such as entrepreneurism, privatization, treating the citizen like a ‘customer’ and management techniques derived from the production process,” Box wrote. “The idea that government should mimic the market is not new in American public administration, but the current situation is particularly intense.”

Under President Bush and the Office of Management and Budget, some observers argue, the focus on Government Inc. became even more intense and increasingly problematic.

“Running the government like a business won’t happen,” said Howard Weizmann, president of the Private Sector Council at the Partnership for Public Service, a nonprofit advocacy group that promotes public service. “The government isn’t a business.” Congress, not commerce, determines how much the federal government has to spend, and public officials work to provide a public service, not to make a profit. The only reasonable expectation people can have is for the government to be more businesslike, Weizmann said.

Few initiatives illustrate the business orientation of the Bush administration and Republican-led Congress more than their focus on pay for performance, or what businesses call merit-based pay. For nearly 50 years, government has based federal pay raises primarily on length of service.

“There’s nothing [in the private sector] you can compare to the civil service system,” Courtland said. 

The Bush administration proposed pay for performance as the basis for a new civil service salary system to replace the 50-year-old General Schedule of fixed pay grades and 10-step pay increases within each grade. The Defense Department and some civilian agencies now have pay-for-performance plans, and administration officials said agencies need a more flexible pay system governmentwide if they expect to attract high-caliber new employees.

Pay for performance
Under the General Schedule, for example, a scientist rated at GS-7 Step 10 earns $47,669. Many talented scientists could easily find a job paying six figures in private industry, said Jeff Pon, chief human capital officer at the Energy Department. “We’re competing for the same workforce everybody else is,” often at a great disadvantage, he added.

Some federal managers cynically refer to the GS system as pay for pulse, meaning people in similar positions get paid the same amount, regardless of sharp differences in their performance. But other managers say they work under reasonable pay constraints dictated by Congress, which appropriates the money that agencies use to pay federal employees.

Unlike businesses, which can often afford to reward top performers because their work contributes to increased revenues and profits, agencies must accept the appropriation that Congress provides for federal pay. Contingencies often prevent agencies from exercising even limited discretion over spending those funds for pay increases.

At the end of each fiscal year, agencies often decide to hold off on pay increases until they get new appropriations, said Carol Bonosaro, president of the Senior Executives Association, a group that represents the interests of career federal executives. Decisions about merit pay increases “are easier in private industry because you’re not hostage to when Congress is going to act or to line-item budgeting that ties your hands.”

Another difficulty in adopting pay for performance is determining how to measure job performance in agencies, Bonosaro said. “You’ve got the bottom line, the profit motive, in the private sector,” she said. “There are places in government where it’s easier to do and places where it’s harder to do.”

Weizmann tries to avoid the phrase pay for performance, saying it misses the point. Pay for performance puts the focus on individual accomplishment rather than organizational performance, he said. Businesses have the advantage of being able to link some employees’ performance to the profit margin, he said.

Many people lack a historical perspective about pay systems, Weizmann said. Until the 1980s, most large corporate employers used regimented pay systems similar to the General Schedule. Then business underwent a transformation, and people began to change jobs more frequently. Companies had to offer incentives, including higher pay, to attract talented candidates and reward people for superior job performance. But the government, with its appropriated budgets, couldn’t match the pay incentives that businesses could offer, Weizmann said.

No agency has adopted pay for performance as extensively as the Defense Department, where it is the basis of the department’s National Security Personnel System for civilian employees. DOD has also attempted the most ambitious transformation of its business operations. But policy experts say DOD has struggled to adopt the management practices of a multinational corporation, such as setting departmentwide standards to achieve greater efficiencies.

DOD set up an office to find better ways to manage its agencies and components. The Business Transformation Agency (BTA) opened in 2004 and has since taken over dozens of DOD financial management and information technology systems. Its purpose is to apply the best business practices from industry and establish departmentwide standards. But the odds against its success are high.

Turning the ship around
“The biggest thing is how you manage large-scale transformation in an entity of this size,” said Thomas Modly, deputy undersecretary of Defense for financial management. DOD adopted a federated approach, allowing individual organizations to manage their transformation while setting rules for integration and uniform standards. Such an approach is far different from traditional, top-down efforts to transform government, Modly said.

The purpose of BTA’s Business Enterprise Information Service, for example, is to integrate hundreds of financial systems and make their data available to DOD’s leaders. “Every corporation can go on a dashboard and find out exactly how they’re doing financially, and we should be able to do that next year,” Modly said.

Most other federal agencies try to drive change from headquarters, but DOD is taking a corporate approach, said Paul Brinkley, deputy undersecretary of Defense for business transformation.

“Every step BTA has taken has been to align our management thinking to be more like a large multinational corporation, where there are certain things done at the headquarters level and certain things that you hold people accountable for in the subsidiary organizations,” Brinkley said. “People can move quickly, but they do it in a framework of structure, as opposed to having some centralized, top-down, micromanaged approach.”

DOD is also developing materiel data standards so the department can code all of its assets using a common language. Such standards will be the basis for departmentwide supply chain management systems similar to those at companies such as, an online retailer. Customers can buy goods or services from any of Amazon’s partners without knowing the location of those partner companies, Modly said.

But BTA’s leaders say they can only go so far in managing DOD like an efficient multinational business. DOD fights wars overseas and political battles on Capitol Hill, which limit its ability to operate like a business, Brinkley said. BTA’s top priority is to deliver needed goods and services to warfighters, he said. Achieving targeted financial results is not the point.

DOD has focused its business transformation efforts on back-end financial systems. Other federal agencies have made customer service their business focus, but not for financial reasons. People who rely on the government can’t go elsewhere if they don’t like the service.

“The incentive for government to do better by the customer is really a matter of trust,” said David Van Amburg, managing director of the University of Michigan’s American Customer Satisfaction Index (ACSI).

Are you being served?
Van Amburg said the government has been trying to become more customer-focused since the mid-1990s. Former Vice President Al Gore’s National Partnership for Reinventing Government first hired ACSI in 1999 to assess taxpayers’ satisfaction with e-government services. In 2005, Bush administration officials created an interagency committee of government contact center managers to develop standards for customer service.

The federal government has improved customer service by borrowing ideas from and other online retailers, Van Amburg said. But the government has limitations on how much it can spend on e-government services. And it does not make the most of its limited resources, he said. People usually get a friendly person on the phone when they call, but that employee doesn’t always have the answer the caller needs. People would rather get the right answer quickly than have a pleasant chat with someone who can’t help, he said.

Improving customer service through e-government has been less controversial than other business-oriented practices, such as strategic sourcing. Strategic sourcing is the practice of selecting preferred suppliers and negotiating with them for lower costs for goods and services in exchange for a higher volume of business. The Office of Management and Budget issued a memo in May 2005 requiring agencies to use strategic sourcing.

Almost a year and a half later, few agencies have made strategic sourcing an integral part of their business operations, some procurement experts say. Many federal managers don’t fully understand the concept, they add.

Strategic sourcing starts slowly
“It starts off with identifying what your demand is, [then] quantifying what your specs are,” said Seth Balsam, senior manager of strategic sourcing at Ariba, an e-commerce company. Agencies must assess their suppliers to determine what discounts they can expect. Agencies have been slow to adopt strategic sourcing because it is a complex practice that takes time to perfect, he added.

For agencies to make the most of new procurement approaches, they must develop new strategies, Balsam said. Agencies that try innovative procurement practices, such as strategic sourcing, often accept the least expensive offer.

“It brings in some competition, but I don’t think it optimizes what you can do,” Balsam said. “It’s not that holistic approach where you’re really trying to do the best you can to get that [lowest] total cost of ownership.”

Some agencies have mastered reverse auctions as a strategic sourcing tactic, Balsam said. In reverse auctions, sellers attempt to underbid one another until the price falls low enough and the customer buys. Reverse auctions have opened doors for small companies to do business with agencies that advertise on Web sites, such as, for the items they want to buy. 

As of August, the State Department reported projected fiscal 2006 savings of $17.6 million from 4,700 reverse auctions for items on which it had planned to spend $186.7 million, said Douglas Stuck, director of civilian agencies at FedBid.

State is happy with the reverse auction process, which the department uses for purchasing products, not services, a State spokeswoman said. “For fiscal year 2006, our cost savings have averaged 7 percent,” she said. The online auction process also reduces the time normally required to complete a competitive acquisition, she added.

State determines the best value in such auctions by evaluating cost with other factors, such as delivery time. Almost all of the auctions that State runs are limited to contractors listed on General Services Administration schedule contracts, the spokeswoman said. “Prior to award, we often will contact the apparent winner to review the bid to make sure that all terms and prices were clearly understood,” she added.

Many people confuse strategic sourcing with competitive sourcing, but the two have little in common except that they are business initiatives championed by Bush administration officials. Competitive sourcing requires federal agencies to identify job functions that are suitable for competition with the private sector. Employees on the agency side of the competition must find ways to operate more efficiently to prevent the government from outsourcing their jobs.

Competitive sourcing
“Appropriations dollars are always scarce, and agencies that are not running efficiently are always at risk of having their function reduced, transferred, privatized or eliminated,” said Randy Erwin, legislative director of the National Federation of Federal Employees, a federal employees union. “For federal workers, that means their jobs are on the line if their agency is not performing.”

Fixed agency budgets, however, make it harder for agencies to compete with the private sector on innovative solutions to problems, some observers say. A recent National Academy of Public Administration (NAPA) study, “New Tools for Implementing ‘Most Efficient Organizations,’” found that when budgeted funds are slow to arrive, employees who win competitive sourcing bids often find it hard to meet their contract’s performance standards. 

The flood gates are now open for the private sector to compete for federal jobs, said Frank DiGiammarino, program area director for management studies at NAPA. But in its research, NAPA found that federal employees want more flexibility when they win competitive sourcing contracts so they can become entrepreneurial and less bound by bureaucratic regulations.

Courtland said she supports competitive sourcing and other Bush initiatives but recognizes that competition has a different meaning in government than in the business world. Courtland said the government has socioeconomic concerns that necessitate spending taxpayer money with businesses that fit certain categories, such as woman-owned, small or disadvantaged.

“You can’t possibly expect something to work like a business and do that at the same time,” she said. “Businesses make their economic decisions based on economics.”

Government Inc. faces many challenges as the Bush administration enters its final two years. But policy experts agree that, at least, the federal government is more business-minded than it was when President Bush took office in 2001.

David Hubler, Josh Rogin, Aliya Sternstein and Matthew Weigelt contributed to this story.
Bureaucratic rules can slow customer serviceExcept in emergency circumstances, such as those in the aftermath of Hurricane Katrina, the General Services Administration’s contact center employees must maneuver their way through layers of bureaucracy before they can deliver information technology goods and services to other federal agencies, said GSA Administrator Lurita Doan. That’s in sharp contrast to the private sector, in which people can walk into an electronics store and buy a new laptop PC on the spot.

Doan said she wants to see those kinds of businesses on GSA contract vehicles so government customers can take advantage of that convenience within the federal procurement system.

Expedited customer service is a goal of NASA’s Scientific and Engineering Workstation Procurement (SEWP) program, which has a policy of processing orders within 24 hours. But speed cannot come at the cost of accuracy and legality, said Joanne Woytek, SEWP’s program manager.

Some customer service experts say federal rules and regulations sometimes work against good service by making transactions more complicated than ordinary business transactions. Government customer service tends to be focused on compliance, said Scott Broetzmann, president and chief executive officer of Customer Care Measurement and Consulting.

Service representatives in some agencies put legislative reporting requirements ahead of customers, if faced with that choice, Broetzmann said. “That takes the focus off of the customer and the focus off of the trust-building,” he said.
— Aliya Sternstein
Competitive sourcing could create more innovationFederal procurement officers too often are stuck in a rut and need to try something new, said Cathy Garman, senior vice president for public policy at the Contract Services Association (CSA).

“There’s a lot that can be learned from looking at the private sector and the best practices of the private sector,” Garman said. One way agencies can do that is by conducting competitive sourcing competitions in which their employees compete against private-sector workers to see who can do a job most cost-effectively.

“By going out and trying to involve the private sector, you might get a whole new solution that you might not have thought about,” she said. 

About 80 percent of such competitions, however, end with the federal employees as the winners. That statistic makes some industry officials suspect that federal agencies simply are not serious about competitive sourcing and wonder whether it’s worth their companies’ time and effort to compete.

CSA, the Professional Services Council and the Army’s primary contracting agency have organized a task force to improve the Army’s approach to competitive sourcing. “A lot can be done, and people are very hopeful of the process,” Garman said. “It’s just that maybe the agencies aren’t taking advantage of it as they should.”
— David Hubler


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