Senate urges privatizing DOD finance

The Senate version of the Defense authorization bill passed last month requires the Defense Department to study the feasibility of privatizing the core operations of the Defense Finance and Accounting Service.

According to the bill, Defense Secretary William Cohen would be required to submit a written report to Congress by October 1999 describing how DOD's finance and accounting functions would be affected by competing the work to the private sector and other government agencies. DOD also must include a comparison of the costs of farming out these functions vs. keeping them with DFAS.

DFAS was established in 1991 to consolidate finance and accounting operations across DOD. In 1992 DFAS began consolidating 332 offices to five central finance and accounting centers and 18 operating locations. DFAS processes a monthly average of

9.8 million payments to DOD personnel, 830,000 commercial invoices, 730,000 travel vouchers and 200,000 transportation bills. The agency's monthly disbursements total about $22 billion.

The agency also plans to consolidate its financial computer systems from the 1996 level of 67 to nine by fiscal 2002. In the same period, DFAS plans to reduce the number of general fund and other departmental accounting systems from 77 to eight and the number of working capital accounting systems from 73 to 15.

The most likely candidates for privatization would be payroll processing and distribution, travel vouchers, credit card business, contractor payment and retiree payments, according to several industry executives. Information technology companies already provide these services at centralized locations for other corporations and could take on the DFAS work without increased overhead, an industry source said. The policy, planning and budgeting functions of DFAS likely would be considered "inherently governmental" functions and would not be privatized.

While DOD's major reform initiatives call for the privatization of infrastructures— including accounting, logistics, housing and data processing centers— DFAS could be a sticking point because of political issues, one industry source said. Its centers are scattered nationwide, giving the centers a large base of political support. "There's been foot-

dragging on lots of people's parts," the source said. "It will be fraught with political issues and problems from all angles."

The complexity and magnitude of DFAS' operations also may hamper privatization efforts, said Bert Concklin, executive director of the Professional Services Council. "It's an artificial comfort level to have this huge structure of nonproductive practices and overinflated checks and balances imposed on contractors," Concklin said.

DFAS officials already are performing five feasibility studies for privatizing various functions, including civilian pay and transportation accounting, said Norman Noe, DFAS assistant deputy director for external services. The expected savings from the studies, which are due to be completed in 1999 and 2000, will be $51 million, Noe said. "We consider ourselves a partner with the private sector," Noe said. "Over $35 million is work that we contract out for software development alone."

Despite possible impediments, Concklin noted that the era of acquisition reform may nudge DFAS operations toward privatization. "We are on a path of substantial deregulation and improvement of the federal acquisition system," he said. "The whole realm of finance and accounting...has not caught up with or participated sufficiently in that process. We're still in the early 20th century regulatory posture in that realm."