A Public-Private Affair - Competitive Sourcing

Use of market-based policy tools and incentives was seen as a predisposition or mind-set as to how managers would approach public management issues. It is an assumption or policy preference that asks why the traditional ways should be used to deliver a service rather than why a market-based approach should be used. Rather than an ideology, it could be be seen as a starting place for problem solving. There is a range of market-based tools for delivering internal services, public services, and regulatory standards.

Presidents Eisenhower, Clinton, and Bush - how did they help move the needle on competitive sourcing? John Kamensky explains.

What Is Competitive Sourcing? Competitive sourcing is the most visible market-based tool for delivering federal services. Agencies compete existing governmental functions that are classified as commercial in nature between those in government who are currently providing the services and potential providers in the private sector.  OMB has created a set of rules governing these competitions, which are detailed in OMB Circular A-76, “Performance of Commercial Activities.”  Competitive sourcing was implemented most visibly in the early 2000s. but its roots that go back decades and its lessons still guide commercial activities today.

Background.  The Eisenhower Administration was the first to call for competition between the government and private sector in the delivery of services.  It is commonly referred to by its administrative name “A-76.”  A-76 outlines the methodology for executive branch agencies to use in valuing their in-house activities and comparing them to similar functions being provided commercially. A-76 includes safeguards to ensure fairness in the valuation and competition processes, but the data needed and the details in the calculation methodology can require years to resolve. Efforts to streamline the process, however, led to controversy.

This approach was used off-and-on over time, picking up in the Clinton Administration in Defense, but then expanding governmentwide with the onset of the Bush Administration.

The approach was long seen as inherently controversial, with a constant tug of war over what constituted “inherently governmental” work.  Are air traffic controllers inherently governmental function – after all, these functions are delivered commercially in an number of other countries.  What about postal workers? Medical doctors? Prison guards? There have been many debates over the definition.  In fact, OMB’s A-76 guidance in the early 2000s took 17 pages in an attempt to define the phrase “inherently governmental.”

Use of Competitive Sourcing in Defense. Competitive sourcing was used extensively in the Defense Department in the 1990s. A 2004 IBM Center study by Jack Gansler and Bill Lucyshyn examined 1,220 competitions completed over a 10-year period in the Defense Department (1994-2004). These competitions covered more than 94,500 positions. Estimated savings from the winning proposals (public or private) averaged about 44 percent, or about $11.2 billion. While the number of positions were reduced by nearly 25,000, less than five percent was via involuntary separation. In his study, contractors won 56 percent of the competitions compared to 44 percent for the in-house bids.

In 1998, Congress passed the Federal Activities Inventory Reform Act of 1998.  This law mandated an inventory of every federal position considered commercial and to publish the results. FAIR Act inventory is updated annually by each agency. The first inventory released in 2001 deemed half of all civilian jobs - or about 850,000 positions – were commercial in nature.

Competitive Sourcing in the Early 2000s.  Competitive sourcing was made more prominent as one of the five pillars of the Bush’s Administration’s President’s Management Agenda. In 2001, OMB Director Mitch Daniels set a bold target of competing up to half of the positions identified by FAIR Act inventory as having a commercial counterpart.  This would have been 425,000 positions.

Because the A-76 rules governing competition were seen as overly complex, a congressionally mandated Commercial Activities Panel developed a set of principles to improve the A-76 government sourcing framework to better reflect a balance between taxpayer interests, government needs, employee rights, and contractor concerns. Its report concluded that if government employees doing commercial work could be competed, the government could save about $5 billion a year.

A-76 was revised in 2003 to shortened and simplify a complex process from 4 years to 1 year. When it was released, OMB Director Daniels said: “For quality service at the best price, competition beats monopoly every time. It is an established fact that fair competition can save taxpayers an average of 30 percent, whether the work is ultimately done in-house or by outsiders. Whoever wins the competitions, we can be confident that taxpayers will.”

Angela Styles, who was the head of OMB’s Office of Federal Procurement Policy, led the implementation of the overall competitive sourcing initiative.  However, it was publicly perceived as an effort to privatize government jobs, not necessarily competing them to find which provided best service at the best price.  This perception, however, flew in the face of the actual facts.  For example, in a 2005 progress report, OMB noted that in 2004, there were 217 competitions and the government entity competing against the private sector won the bid 91 percent of the time, but the streamlining led to about $1.4 billion in savings, about $22,000 per position. And in a progress report to Congress in 2007, OMB reported that 87 percent of the competitions were won by the in-house government team, which had created what was called the “most efficient organizations”.  – The report claimed that cumulative savings since the beginning of the Bush administration totaled about $6.9 billion.

However, even when a government entity won, this still sometimes led to job losses. For example, an IRS unit that competed to continue to serve as a publications distribution center won the competition but its bid cut the 400-person workforce by about 60 percent. This contributed to further discontent with the aggressive use of this tool

Moratorium on Competition.  Congress suspended A-76 competitions in the Defense Department in January 2008 amid concerns that OMB’s streamlined A-76 guidance overstated savings and understated costs, thereby tilting the competition in favor of the private sector. In fiscal year 2012, the moratorium was extended to all civilian agencies. The moratorium continues today, though the current Administration has tried to lift it every year.

Lessons for Future. Any reforms dealing with personnel are always sensitive issues with employees and unions, and how they are framed and communicated matters. The Competitive Sourcing initiative as advanced under the PMA became linked “market-based government” and “competitive sourcing” in more with actions that were automatically perceived as threats to government work and workers.  So, while the evidence showed positive benefits could be derived from a periodic re-examination of how in-house work is done, this particular administrative approach has not been carried out since.

However, public-private competitions have successfully been implemented as part of the Shared Services initiative that started in the Obama Administration, with human resources services being competed under a procurement vehicle that includes private sector providers. This evolution demonstrates that if framed properly and accounting for lessons learned from the past, competitions can be implemented in a way that brings commercial best practice to government for improved service delivery.