Outsourcing Trend Demands Closer Examination

November 2000
By James H. Ward

In the move toward depending on contractors, the pros and cons must be weighed carefully.

Nowhere does the battle for or against outsourcing rage more fiercely than in the halls of the Pentagon, seat of the most powerful military in the world. The U.S. Defense Department is finding itself in the throes of a debate that might, over time, cause it to cede its hegemony to commercial forces and lose the tools it will need to fight on distant battlefields.

Experts have discussed the differences between the roles that the private sector and government play in providing for the common defense, and some point to the critical distinction between business and government. Making money is among the foremost goals of business. Government also has many goals, and ensuring the well-being of its citizens is a top priority.

Five basic principles summarize the differences between these two entities—purpose, people, time, money and hierarchy. In each case, the interests of business and government can be significantly at odds with each other.

The broadly defined outsourcing of information technology is one area where clashing priorities could lead to substantial challenges. While not without some merit, this approach to providing the military with capabilities may violate its constitutional mandate and could, if applied in its most liberal sense, lead to national security perils from which the United States might not recover.

Outsourcing is not a new phenomenon in the United States. The Eisenhower administration made it a part of U.S. government policy not to impede business. In 1955, President Eisenhower said that the federal government would not start or carry out any commercial activity to provide a service or product that can be procured from private enterprise through ordinary business channels. In short, the business of government is not business.

In 1966, the Office of Management and Budget (OMB) issued a groundbreaking document, Circular A-76, that spelled out the methods and processes needed to divest the government of all but its core competencies.

Since 1966, the Pentagon has engaged in a robust contracting program. According to a Business Executives for National Security special report, nearly every support function in the Defense Department has been outsourced in some way. The figures indicate that 47 percent of data processing has been accomplished through contracts with the commercial sector.

The outsourcing process at White Sands Missile Range is one example. According to its former commander, Brig. Gen. Harry D. Gatanas, USA (Ret.), the range survived 22 OMB examinations, known as A-76 studies. This occurred because mission posture and a streamlined work force with better resources led arbitrators to conclude that the government could perform the functions more effectively.

The experience with the missile range exemplifies how the five principles can be applied to examining the role of outsourcing. Since the range’s primary purpose is to conduct missile tests, the studies concluded that the in-house work force possessed the requisite skill set to perform the function. In other words, missile range personnel understood how to run a complex process like missile testing.

Once they had the necessary tools to improve their efficiency—such as faster computers, a flattened organizational structure and capital equipment—they clearly demonstrated that they could handle the task. The A-76 study may have in fact helped the existing work force by compelling the organization to modernize its operation. The study team found that in the area of missile testing, a long-term view of the mission of the range was far preferable to contracting the function out.

These Defense Department evaluation processes also apply to outsourcing modernization of installations’ information infrastructure architecture.

John Thorpe, deputy chief of information management for the U.S. Army Pacific, points out that mission and location also are factors in weighing outsourcing decisions. For example, in Hawaii all Army telephone services run on the commercial Hawaii Island Telephone System. The Army’s entire end-to-end system was outsourced several years ago, and according to Thorpe, the cost of this imminently affordable system keeps increasing by as much as 30 percent a year.

However, this problem is much broader. Across-the-board outsourcing promised to cut costs, improve service and help organizations move to new technology more quickly by tapping contractors’ skilled staffs. But those benefits often have not materialized.

A study released by Deloitte & Touche Consulting Group shows that outsourcing falls short of user expectations in key areas such as vendor expertise. In fact, more than half of the companies surveyed by the consulting firm Dataquest Incorporated have renegotiated their outsourcing contracts, 16 percent of those switched vendors, and 8 percent pulled information technology back in-house.

In the 516th Signal Brigade, other areas such as technical control and the regional computer response team also have been outsourced. In these two examples, problems with security clearances and high worker turnover have plagued government management.

In the Pacific region, systems include those in Alaska, Okinawa and mainland Japan. In Alaska, the commander of U.S. Army Alaska came out on top after results from two OMB A-76 studies were reviewed. It was the nature of the organization’s missions and functions that proved to be critical factors in the findings.

Okinawa and Japan offer a glimpse of another critical issue. In both of these locations, where the 516th Signal Brigade has two battalions, the Japanese work force plays an important role. Under the Master Labor Contract, the Japanese government pays the salaries of all Japanese employees. Outsourcing these operations could increase the cost of doing business.

In the continental United States, which has numerous information technology firms, OMB studies could be conducted on all installations with an eye toward outsourcing the information technology business area. However, under provisions of the Federal Activities Reform Act of 1998, in order for a federal function to be outsourced, it must be considered nongovernmental. This proviso should offer specific relief to the Defense Department.

In the area of information technology infrastructure modernization, this issue of command and control has never been so important. To be sure, many of the information management tools can and are being purchased from industry. This does not, how ever, mean that the people engineering, installing and operating them should also be outsourced.

Experience at the Army’s Directorate of Information Management (DOIM), Huntsville, Alabama, is one example. According to DOIM officials, the entire information management function was contracted out several years ago. Now, efforts to reverse their earlier decision are underway through the OMB process. These officials cite cost and loss of control as the twin reasons for their decision.

This development points to other areas of concern. Nowhere is this more serious than in the areas of corporate knowledge and reversibility. Should information technology modernization be outsourced, the one initial year plus four additional years written into most contracts might reduce the institutional memory that has proven so valuable in the area of force modernization. According to a recent General Services Administration (GSA) white paper, “Agency corporate knowledge is being drained. Agencies increasingly have to rely on the skills of service providers who are new to the arena. …”

Reversibility is also an issue. “Critics of outsourcing express concern that once IT functions have been turned over to a contractor, it will be too costly to reverse the situation and return them in-house,” the GSA report continues. While it is possible to reverse outsourcing arrangements, it is important to note that the Army After Next construct requires end-to-end systems command and control. The advent of hostilities is no time to attempt to revert to in-house management of these end-to-end systems. There will simply not be time to do so effectively.

As the Defense Department establishment eyes its information operations for the next 25 years, interoperability between soldiers on the battlefield and their sustaining bases will become paramount. Simply put, information management is a core military function, now more than ever.

Unfortunately, these purely strategic and tactical concerns have not slowed down the OMB study process.

Since information technology can be defined as a governmental function, cost comparisons are specious arguments, at best. Information technology will provide the strategic and tactical backbone of the Army in the years to come. In fact, it will be as much a part of the Army as the warfighter it supports and as such cannot be separated because of a need to show cost savings. According to the GSA white paper, the decision process for outsourcing must be directly interrelated with the long-range, strategic planning process.

The Outsourcing Institute, referenced in the same GSA paper, offers this observation: “…Overemphasis on short-term benefits is a clear sign of an outsourcing project that will prove unsuccessful. When the strategic reasons for outsourcing are over-shadowed by short-term business concerns, companies are often disappointed. …”

Further, an in-house work force must be retained because it is the only way the United States can look into the future and define the evolving information infrastructure it will need to support the revolution in business and military affairs. Outsourcing specific, short-term projects as a part of a step-by-step process will be a critical component, but only an in-house work force will operate in the best interests of the nation.

As the GSA paper suggests, an acceleration of training and the use of best business practices as byproducts of the OMB A-76 study process will need closer examination and additional resources. Inherent differences exist between the operating styles of the contractor and the Army. The business of government revolves around the peoples’ work. This is antithetical to the way the business community operates.

The structure of program managers, cross-functional commands, evolving guidance from superiors, and the evolving nature of providing national defense make whole-systems outsourcing undesirable. This approach, which leads to a consensus, has and will continue to serve the public interest because it affords all stakeholders a chance to provide input. It also allows for long-term structural changes on installations as new missions or changes in old missions develop. Simply put, making such changes in a contractor-owned, contractor-operated world would run counter to the public interest at best and reduce responsiveness to changing world events at worst. This would lead to reduced combat effectiveness, regardless of the efficiency it might temporarily create.

As the Army moves toward Joint Vision 2020 and the knowledge-centric global information grid, care must be taken to ensure that the soldier on the battlefield is not cut off from the sustaining base because of the short-term consciousness of the contractor, who views the bottom line in terms of dollars. In the eyes of the soldier, the bottom line is winning the next battle, not maximizing profit.


James H. Ward is a research analyst for the Information Systems Engineering Command, Fort Huachuca, Arizona. He holds a bachelor of science degree in government and politics from the University of Maryland.

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