Step 2: --Making Service Organizations Compete

While our federal government has long opposed private monopolies, it has deliberately created public ones. For instance, most federal managers must use monopolies to handle their printing, real estate, and support services. Originally, this approach was supposed to offer economies of scale and protect against profiteering and corruption. In an earlier time--of primitive recordkeeping, less access to information, and industrial-era retail systems--it may have offs absorb them. A monopoly's managers don't even know when they are providing poor service or failing to take advantage of new, cost-cutting technologies, because they don't get signals from their customers. In contrast, competitive firms get instant feedback when customers go elsewhere. No wonder the bureaucracy defends the status quo, even when the quo has lost its status. monopoly's managers don't even know when they are providing poor service or failing to take advantage of new, cost-cutting technologies, because they don't get signals from their customers. In contrast, competitive firms get instant feedback when customers go elsewhere. No wonder the bureaucracy defends the status quo, even when the quo has lost its status.

The Air Combat Command--Flying High With Incentives and Competition

The military: the most conservative, hierarchical and traditional branch of the government and the bureaucracy least likely to behave like a cutting-edge private company, right? Wrong.

One of Washington's most promising reinvention stories comes from the Air Combat Command. With 175,000 employees at 45 bases across the country, the ACC owns and operates all of the Air Force's combat aircraft. Says its commander, General John Michael Loh, "We manage big, but we operate small."

How? The ACC adopted overall performance standards, called quality performance measures. Each ACC unit decides for itself how to meet them. General Loh then provides lots of incentives and a healthy dose of competition.

The most powerful incentive is the chance to do creative work, General Loh told the National Performance Review's Reinventing Government Summit in Philadelphia. For instance, the Air Combat Command allows maintenance workers to fix parts that otherwise would have been discarded or returned to the depot for repair "under the thesis that our people aren't smart enough to repair parts at the local level." The results have been astonishing. Young mechanics are taking parts from B-1s, F-15s, and F-16s- -some of which cost $30,000 to $40,000--and fixing them for as little as $10. The savings are expected to reach $100 million this year. ACC managers have an incentive, too: Because they control their own operating budgets, these savings accrue to their units.

General Loh instilled competition by using benchmarking, which measures performance against the ACC standard and shows commanders exactly how their units compare to others. The ACC also compares its air wings to similar units in the Army, Navy, and Marine Corps; units in other Air forces; and even the private sector. Before competition, the average F-16 refueling took 45 minutes. With competition, teams cut that time to 36 minutes, then 28.

The competition is against a standard, not a fellow ACC unit. "If you meet the standard, you win," says General Loh. "There aren't 50 percent winners and 50 percent losers. We keep the improvement up by just doing that--by just measuring. If it doesn't get measured, it doesn't get improved."

As for economies of scale, the realities have changed. The philosophy when these procurement systems were set up was that if the government bought in bulk, costs would be lower, and taxpayers would get the savings. But it no longer works that way.

As we discuss more fully in chapter 1, we no longer need to buy in bulk to buy cheaply. The last decade has brought more and more discount stores, which sell everything from groceries to office supplies to electronic equipment at a discount. The Vice President heard story after story from federal workers who had found equipment and supplies at discount stores--even local hardware stores--at two-thirds the price the government paid.

"It is better to abolish monopolies in all cases than not to do it in any." Thomas Jefferson Letter to James Madison, 1788

Not all federal operations should be forced to compete, of course. Competition between regulatory agencies is a terrible idea. (Witness the regulation of banks, which can decide to charter with the state or federal government, depending on where they can find the most lenient regulations.) Nor should policy agencies compete. In the development of policy, cooperation between different units of government is essential. Competition creates turf wars, which get in the way of creating rational policies and programs. It is in service delivery that competition yields results--because competition is the one force that gives public agencies no choice but to improve.

The Government Printing Office

Perhaps the oddest federal monopoly is the Government Printing Office. In 1846, Congress established a Joint Committee on Printing (JCP) to promote efficiency and protect agencies from profiteering and abuse by commercial printers. The JCP sets standards for all agency activities--including printing, photocopying, and color and paper quality. When the Naval Academy wants to use parchment paper for graduation certificates, for instance, the JCP must approve the decision.

The JCP also supervises the Government Printing Office, the mandatory source of most government printing--a whopping $1 billion a year. Along with printing federal publications, the GPO must approve all privately contracted government printing jobs. This even includes printing orders less than $1,000--of which there were 270,000 in 1992. Simply for processing orders to private companies, GPO charges 6 to 9 percent.

Such oversight doesn't work in an age of computers and advanced telecommunications. Desktop publishing has replaced the traditional cutting and pasting with computer graphics and automated design. In private business, in-house printing flourishes. Small printing companies specialize in strategic market niches.

The "government look"

Here's a sad story about the Government Printing Office, multiple signatures, and $20,000 of wasted taxpayer money. Vice President Gore heard it from an employee at the Transportation Department's National Highway Traffic Safety Administration, which promotes highway safety. Hoping to convey safety messages to young drivers, her office tries to make its materials "slick"--to compete with sophisticated advertising aimed at that audience. Sound simple? Read on. After the agency decides what it wants, it goes through multiple approvals at the GPO and the Department of Transportation. In the process, the material can change substantially. Orders often turn out far differently than NHTSA wanted. But under the GPO's policy, agencies must accept any printing order that the GPO deems "usable." "I can cite one example where more than $20,000 has been spent and we still do not have the product that we originally requested," the employee explained, "because GPO decided on its own that it did not have a `government' look. We were not attempting to produce a government look. We were trying to produce something that the general public would like to use."

Action: Eliminate the Government Printing Office's monopoly.

See Note 25

For all executive branch printing, Congress should end the JCP's oversight role. Congressional control of executive branch printing may have made sense in the 1840s, when printing was in its infancy, the government was tiny, there was no civil service, and corruption flourished. But it makes much less sense today. We want to encourage competition between GPO, private companies, and agencies' in-house publishing operations. If GPO can compete, it will win contracts. If it can't, government will print for less, and taxpayers will benefit.

The General Services Administration

Among government's more cumbersome bureaucracies is the General Services Administration (GSA), which runs a host of federal support services--from acquiring and managing 250 million square feet of office space to managing $188 billion of real estate, from brokering office furniture and supplies to disposing of the government's car and truck fleets.

With its monopoly, GSA can pass whatever costs it wants on to tenants and customers. Often it rents the cheapest space it can find, then orders federal agencies tooccupy it- -regardless of location or quality. (Occasionally an agency with enough clout refuses, and GSA ends up paying to rent empty space.) And this is not all GSA's fault. Frequently, the agency is hemmed in by federal budget and personnel rules. GSA admits that many of its customers are unhappy. It has already permitted some agencies to make their own real estate deals. We propose to open that door farther.

Action: The President should end GSA's real estate monopoly and make the agency compete for business. GSA will seek legislation, revise regulations, and transfer authority to its customers, empowering them to choose among competing real estate management enterprises, including those in the private sector.

See Note 26

Specifically, GSA will create one or more property enterprises, with separate budgets. The enterprises will compete with private companies--real estate developers and rental firms--to provide and manage space for federal agencies. Agencies, in turn, will lease general purpose space and procure, at the lowest cost, real property services--acquisition, design, management, and construction. Such competition should lower costs for federal office space.

All other federal agencies with real estate holdings, including the Defense and Veterans Affairs Departments, will adopt similarly competitive approaches.

Dialing for Dollars: How Competition Cut the Federal Phone Bill

In the mid 1980s, a long-distance call on the federal system, which the General Services Administration manages, cost 30 to 40 cents a minute, the "special government rate." AT&T's regular commercial customers normally paid 20 cents a minute. The Defense Department, citing GSA's rates, would not use the government-wide system.

Spurred by complaints about high costs and the loss of customers, GSA put the government's contract up for bid among long-distance phone companies. It offered 60 percent of the business to the winner, 40 percent to the runner up.

Today, the government pays 8 cents a minute for long-distance calls. More agencies- -including the Defense Department--are using the system. And taxpayers are saving a bundle.

Competition in Support Services

Every federal agency needs "support services"--accounting, property management, payroll processing, legal advice, and so on. Currently, most managers have little choice about where to get them; they must use what's available in-house. But no manager should be confined to an agency monopoly. Nor should agencies provide services in-house unless the services can compete with those of other agencies and private companies.

Over the past decade, a few federal entrepreneurs have created support service enterprises, which offer their expertise to other agencies for a fee. Consider the Center for Applied Financial Management, in the Treasury Department's Financial Management Service. A few years ago, Treasury officials realized that many agencies reporting to their central accounting system had problems meeting the Treasury's reporting standards. Rather than send nasty letters, they decided to offer help.

The Treasury established a consulting business. The center includes a small group of people who offer training, technical assistance, and even a system for accounting programs so that agencies need not own the software. The center markets its services to government agencies, aggressively and successfully, competing with accounting and consulting firms for agency business and dollars. Its clients include the Small Business Administration and the Nuclear Regulatory Commission. Already, the center's work has reduced the errors in reports submitted to the Treasury and reduced agencies' accounting costs. Opened 2 years ago, the center plans to be profitable by 1995; if not, the Treasury will close it.

Action: The administration should encourage operations of one agency to compete for work in other agencies.

See Note 27

We want to expand the approach exemplified by Treasury's Center for Applied Financial Management throughout government. Just as in business, competition is the surest way to cut costs and improve customer service.

Competing with the Private Sector

Forcing government's internal service bureaus to compete to please their customers is one strategy. Forcing government's external service organizations to do the same is another. In a time of scarce public resources, we can no longer afford so many service monopolies. Many federal organizations should begin to compete with private companies. Consider the National Oceanic and Atmospheric Administration.

Action: The National Oceanic and Atmospheric Administration (NOAA) will experiment with a program of public-private competition to help fulfill its mission.

See Note 28

NOAA, a part of the Commerce Department, maintains a fleet of ships to support its research on oceans and marine life and its nautical charting. But its fleet is reaching the end of its projected life expectancy. And even with the fleet, NOAA has consistently fallen far short of the 5,000 days at sea that it claims to need each year to fulfill its mission. NOAA faces a basic question--whether to undertake a total fleet replacement and modernization plan, estimated to cost more than $1.6 billion in the next 15 years, or charter some privately owned ships.

The experience of the U.S. Army Corps of Engineers, which contracts out 30 to 40 percent of its ocean floor charting to private firms, shows that the private sector can and will do this kind of work. Competition among private companies for these services also might reduce costs.

Action: The Defense Department will implement a comprehensive program of competitive contracting non-core functions competitively.

See Note 29

The Defense Department is another agency in which necessity is becoming the mother of invention. Facing a swiftly falling budget, the department literally can't afford to do things in its usual way--especially when private firms can perform DOD's non-core functions better, cheaper, and faster. Functions such as command, deployment, or rotation of troops cannot be contracted, of course. But data processing, billing, payroll, and the like certainly can.

Private firms--including many defense contractors--contract out such functions. General Dynamics, for instance, has contracted with Computer Services Corporation to provide all its information technology functions, data center operations, and networking. But at the Pentagon, a bias against out-sourcing remains strong. Only a commitment by senior leaders will overcome that bias.

In addition to the cultural barriers at the Pentagon, numerous statutory roadblocks exist. In section 312 of the fiscal year 1993 DOD Authorization Act, for example, Congress stopped DOD from shifting any more in-house work to contractors. Another law requires agencies to obtain their construction and design services from the Army Corps of Engineers or Naval Facilities Engineering Command. The administration should draft legislation to remove both of these roadblocks. It will also make contracting easier by rescinding its orders on the performance of commercial activities and issuing a new order, to establish a policy supporting the acquisition of goods and services in the most economical manner possible. OMB will review Circular A-76, which governs contracting out, for potential changes that would simplify the contracting process and increase the flexibility of managers.

Action: Amend the Job Training Partnership Act to authorize public and private competition for the operation of Job Corps Civilian Conservation Centers.

See Note 30

The Labor Department's Employment and Training Administration (ETA) supervises 108 Job Corps Centers, which provide training and work experience to poor youth. The ETA contracts with for-profit and non-profit corporations to operate 78 of the centers. The department has long sought to contract out the other 30, now run by the Agriculture and Interior Departments as Civilian Conservation Centers. But Congress under the Job Training Partnership Act, has passed legislation barring such action.

Because they are insulated from competition, CCC managers have few incentives to cut costs and boost quality. For the past 5 years, average per-trainee costs at a CCC have run about $2,000 higher than at centers run by contractors. Competition would force the Interior and Agriculture Departments to operate the rural centers more efficiently--or risk losing their operations to private competitors.

Truth in Budgeting

If federal organizations are to compete for their customers, they must do so on a level playing field. That means they must include their full costs in the price they charge customers. Businesses do this, but federal agencies hide many costs in overhead, which is paid by a central office. Things like rent, utilities, staff support, and the retirement benefits of employees are often assigned to the overall agency rather than the unit that incurred them. In this way, governmental accounting typically understates the true cost of any service.

With a new accounting system that recognizes full costs--and assigns rent, utilities, staff support, retirement benefits, and all other costs to the unit that actually incurs them--we can determine the true costs of what government produces. At that point, we can compare costs across agencies, make agencies compete on a level playing field, and decide whether we are getting what we pay for.

Action: By the end of 1994, the Federal Accounting Standards Advisory Board will issue a set of cost accounting standards for all federal activities. These standards will provide a method for identifying the true unit cost of all government activities.

See Note 31

Some government agencies have already moved in this direction. Others have gone even further. The Defense Department is experimenting with what it calls a Unit Cost Budget. It calculates the costs of delivering a unit of service, then budgets for the desired service levels.

The Defense Logistics Agency (DLA) began this experiment, hoping to ease pressures to contract out its supply depots to private companies. DLA examined the cost of receiving and delivering shipments, then attached a dollar figure to each item received and another to each item delivered. All money was then appropriated according to the number of items shipped or received. Line items disappeared, incentives grew. The more boxes a depot shipped or received, the more money that depot brought in. For the first time, DLA could calculate its true costs, compare those of various installations, and pinpoint problems. This approach, which enables managers to set productivity targets, is now spreading to other military installations.