Watchdog warns on 18F's finances

Despite having plenty of satisfied customers, the government startup is losing millions of dollars each year.

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18F, the tech development and consulting shop housed at the Government Services Administration, has a spending problem, according to Capitol Hill's watchdog agency.

According to a Government Accountability Office report set to be released at an upcoming House hearing, 18F lost more than $9 million in FY 2015.  The group is on track to lose $15 million in the current fiscal year, and more than $12 million in FY2017.

"[A]ccording to its projections, 18F plans to generate revenue that meets or exceeds operating expenses and cost of goods sold beginning in fiscal year 2019," the report notes. By that time, 18F predicts revenues topping $101 million and expenses just over $100 million.

NextGov first reported on the GAO probe in a June 3 article.

As a government entity, 18F doesn't have profit as a goal. But the group's authorization requires that it operate on a break-even basis, recovering costs from agency customers. GSA is able to float 18F money for hiring and overhead through the Acquisition Services Fund and other sources, provided it is paid back.

"18F has an agency-approved plan to operate at full cost recovery, and it is on a path to financial sustainability," GSA press secretary Ashley Nash-Hahn told FCW in a statement. "Since recognizing its first dollar of revenue in October 2014, 18F's quarterly revenue has grown nearly three-fold."

Some of 18F's staunchest defenders think that measuring red ink against black ink is beside the point.

John Paul Farmer, a co-founder of the Presidential Innovation Fellows program, which in some respects was a forerunner to 18F, noted on Twitter that, "startups require growth capital," that the group will close its funding gap over time and that the Pentagon reported savings of $150 million thanks to 18F, "in just three days."

18F has been growing quickly since its inception. According to the GAO report, 18F has hired 173 staffers as of March 2016, with 162 onboarded using special non-competitive authority known in government as "schedule A." Those employees are eligible for two-year stints with the possibility of two-year reappointments.

The rapid growth of the organization has made it possible for tech leaders to institutionalize the group as part of the newly constituted Technology Transformation Service. The move aligns 18F and other facets of the former Office of Citizen Services and Innovative Technologies with the other organizational pillars at GSA -- the Federal Acquisition Service and the Public Buildings Service.

FCW has previously reported on GSA's struggles to devise appropriate pricing models for its innovators-as-a-service offerings.

GAO surveyed 18F's customers and found that they were largely quite pleased with the service, giving them more on average 4.38 points out of 5. The U.S. Digital Service, also part of the GAO report, fared even better, rating 4.67 points out of 5 from customers.

A draft of the report was circulated in advance of a planned June 10 House Oversight Committee hearing on 18F and USDS. The report recommends that GSA implement performance measures that focus on outcomes and cost recovery.

The report also expressed concern that the U.S. Digital Service, housed at the Office of Management and Budget, might be operating outside the parameters of federal IT law. The worry is that USDS personnel and agency in-house digital service teams could be operating outside the IT governance system established by the Federal IT Acquisition Reform Act. The GAO report also notes the sometimes-poor coordination between agency CIOs and digital services teams.

Rep. Will Hurd (R-Texas), chairman of the IT Subcommittee of the House Oversight Committee, welcomes the scrutiny. According to a preview of his opening statement, Hurd says he is " concerned by reports that USDS teams may parachute into an agency, 'fix' whatever they perceive was the problem, and then leave -- without the full buy-in and involvement of that agency CIO."

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