Feds should give outsourcing and privatization a real chance

A large-scale outsourcing and privatization (O&P) effort set to begin at the Defense Department could result in the most dramatic change in the federal marketplace in decades. Skepticism abounds, but if government creates the right conditions, the DOD effort could mark the first successful O&P effort by the federal government.

To clarify terms, "outsourcing" shifts a function currently performed by government personnel to an outside provider, but the provider continues to use government facilities to perform the function. "Privatization" involves transferring a function completely to the private sector, including infrastructure ownership, operations, management and maintenance.

DOD has divided personnel into two categories: active mission forces, which are the troops who go to the battlefield; and infrastructure forces, which includes everyone else. Mission forces already have been reduced significantly during the recent waves of DOD downsizing. The O&P program will target the infrastructure forces, which represent about two-thirds of today's active-duty Defense personnel.

The Pentagon wants to fund modernization with savings from the O&P program. The government is not simply looking at a shift of dollars from government to industry payrolls; it's looking at real savings, targeted at about $7.5 billion per year. To achieve these savings, DOD must outsource or privatize $30 billion per year, based on DOD estimates that industry can be 25 percent more efficient than federal operations.

Here's where the skepticism comes in. It is extremely unlikely that industry will be able to achieve any savings using a one-for-one replacement of government personnel. Government salaries are lower than those in industry, and with today's tight labor market, there isn't a prayer that DOD can make its numbers simply by finding less expensive corporate bodies to do DOD jobs the same way those jobs are being done now.

The success of O&P hinges on the answer to a single question: How can industry achieve dramatic savings compared with current government operations? A big part of the answer is privatization.

Under privatization, industry gains the flexibility to make innovative infrastructure investments to enable significant efficiency enhancements. Privatization will allow industry to optimize base communications and computing systems, to regionalize network management functions and to address selected functions using public networks and services.Unlike outsourcing, privatization won't be possible unless DOD makes major changes to the ground rules for industry. Here are five suggestions.

* Allow industry to get rid of outmoded DOD IT infrastructure. Sell it. Trash it. Give it away.

* Give industry real evaluation incentives to buy new, more efficient and cost-effective hardware and software systems as part of its O&P solutions. Reward proposals that make innovative IT investments to reduce personnel costs.

* Make contractual commitments long enough to allow industry to recover infrastructure investments and transition costs. Without assured revenue streams, industry won't risk large capital investments.

* Give industry the flexibility to optimize across organizational boundaries. Allow O&P solutions to cover multiple bases, organizations and regions.

* Provide performance specifications that minimize military-unique features. This will reduce system acquisition costs and increase the potential for shared DOD/commercial user solutions.

This is our first chance to make government O&P work on a large scale. An O&P success for DOD will open up an equally large opportunity on the civilian agency side. Let's give O&P a real chance.

-- Suss is president of Warren H. Suss Associates Inc., Jenkintown Pa., which specializes in market strategy, research and proposals.