DFAS preps outsourcing pact

The Defense Finance and Accounting Service, which is responsible for managing up to $24 billion worth of financial transactions for the Defense Department, may put up for bid the information technology support services for four major payroll accounts. It is a move that could set the stage for another heated competition between private companies and the government.

The payroll processing services are expected to be worth several hundred million dollars and could displace more than 1,150 DFAS employees, according to sources familiar with the deal.

The DFAS outsourcing contract would become the second major contract in as many years to pit federal agencies against industry in trying to win government work. Many in industry worry that the contract could rekindle the controversy over the Federal Aviation Administration's ICEMAN - the Integrated Computing Environment-Mainframe and Networking contract - in which the Agriculture Department beat out several IT companies to provide mainframe processing services.

A DFAS spokeswoman said that DFAS has issued a draft solicitation for IT and printing services to contractors under the General Services Administration's Virtual Data Center program, which offers data center outsourcing services to agencies governmentwide. The VDC's contractors are Computer Sciences Corp., SunGuard Computer Services Inc. and Unisys Corp.

DFAS also plans to invite bids from government sources as well, agency officials said. At least one agency data center, the Agriculture Department's National Finance Center (NFC) is expected to bid on the work. The center provides payroll services to such agencies as the Congressional Budget Office, the Commerce Department and the Federal Communications Commission.

DFAS is focusing on the concept of the "most efficient organization." MEO is part of the Office of Management and Budget's Circular A-76, which calls for agencies to compare the government's cost of providing a service vs. the cost the private sector would charge for the same service.

According to Ken Redding, the DFAS A-76 program manager, DFAS determines the makeup of their MEO by building a new organization from scratch. "We don't even look at the current organization," Redding said. "We basically wipe the slate clean."

The draft solicitation sent to VDC contractors covers IT and printing services for DFAS' Civilian Pay and Military Retiree/Annuitant Pay operations. DFAS also is considering outsourcing its Depot Maintenance Accounting and Transportation Accounting services. Bids are due Aug. 24, and a contract award is planned for January 2000, the DFAS spokeswoman said.

Industry sources familiar with the initiative said DFAS is considering using the VDC contract as a means to select a partner to compete against the NFC for the work.

John Ortego, the director of the USDA's NFC, which also manages the government's multibillion-dollar Thrift Savings Plan, confirmed that NFC is "looking at the solicitation" but said that a business decision has not yet been made.

"It's a very confusing deal right now," said Austin Yerks, senior vice president for business development for CSC's Defense Group. DFAS "wants to create and craft their maximum effective organization or best price in such a way that they have the VDC contractor as their teammate for a bid," he said. CSC plans to bid on the contract, Yerks said.

SunGuard and Unisys could not be reached for comment.

Outsourcing has been a major focus at DOD since Defense Secretary William Cohen unveiled the Defense Reform Initiative in November 1997. At that time, DOD said it planned to compete 150,000 positions between fiscal 1997 and fiscal 2003 under the A-76 process.

Recently, however, DOD raised the bar on its outsourcing goals, announcing that the fiscal 2000 budget provides for the competition of nearly 229,000 positions through fiscal 2005. According to Cohen, turning over so much work to industry will save DOD up to $11.2 billion, which can be put toward updating weapons systems and other key initiatives.

"There's a big concern that this is another ICEMAN and brings up the issue of once again pitting the federal government against industry" in a confrontational manner, an industry source said. "The federal government has shown [during the ICEMAN competition] that they can be very creative with their pricing."

Redding said DFAS is satisfied that the current A-76 process, although not perfect, will provide the agency with the best possible price. In fact, recent supplements to OMB Circular A-76 have "improved the equitability of how industry competes with us," Redding said. "It can be improved, but it's the best process we have right now," he said.