Scalpel or Hatchet? OMB Orders 7% Cut to Contract Spending

Recall a debate last fall where then-Senator Barack Obama differentiated between his “scalpel” approach to spending cuts and the more crude, “hatchet” spending freeze proposed by challenger, Senator John McCain. Obama’s underlying premise was that spending reductions should be achieved through a strategic prioritization process to separate out the lowest-hanging fruit, rather than just a crude, across-the-board freeze (or presumably its popular close cousin, the percentage-based spending cut).

And there’s certainly a logic to this. As my colleague Adrian Moore wrote here, we don’t do crude percentage-based spending cuts at home when times get tight, so why would we do so in government?

However, despite the sentiment expressed in that debate, it appears that President Obama’s approach to federal contracting is shaping up to be part-hatchet/part-scalpel. Per the Federal Times:

In a memo last week, Office of Management and Budget Director Peter Orszag directed agencies to cut their contract spending by 7 percent over the next two years: 3.5 percent in 2010 and 3.5 percent in 2011. That was one of three OMB memos issued last week that aim to flesh out President Barack Obama’s goal of cutting $40 billion a year from contract spending. The memos direct agencies to:

• Accelerate insourcing of inherently governmental work.
• Restore a proper balance between federal and contractor employees at government programs that rely heavily on contractors.
• Share contractor performance reviews with other agencies.

On the positive side, there is some flexibility built in to the policy directive regarding how agencies can achieve the contract spending reductions:

Jeff Liebman, OMB’s executive associate director, said agencies can achieve savings by fixing well-known problems that make their acquisition operations costly. Agencies need to hire more acquisition professionals to manage contracts better, improve upfront planning for large procurements, conduct market research and leverage the government’s buying power better, Liebman said.

Neal Couture, executive director of the National Contract Management Association, agreed. “It’s a reinforcement of some fundamentally good business practices that government may have gotten away from in the last half of the Bush years,” Couture said.

The Orszag memo may force budget and program managers to make reasoned and clear buying decisions before asking contracting officers to take action, he said.

Further, things today generally appear to be shaping up better on the contracting front than they appeared in the spring:

Stan Soloway, president of the Professional Services Council, said the memo puts the emphasis of cost-cutting where it needs to be: on the front end of the procurement process, and not on increased auditing and oversight on the tail end of the process. “It recognizes the key to improving performance is in planning requirements, the award and contract administration,” Soloway said. […]

PSC’s Soloway called Orszag’s memos “a reasoned structure” to guide agencies’ sourcing decisions. “What it tells us is that beyond inherently governmental functions or absolutely mission-critical functions … the insourcing decision is like an outsourcing decision — it’s a decision that should be impartial, analytically rigorous and looks at complete and not just partial costs,” Soloway said.

However, Soloway pointed out in an article last week that agencies may already be working at cross-purposes to the Adminstration on this front, which I discussed in this Friday post.

In all, the Administration’s approach to cutting contract spending seems like a mixed bag. The arbitrary seven percent target runs counter to the notion of the “scalpel.” Rather, that element seems more of a political gesture to curry favor with labor. That said, if you’re going to do a crude percentage based bundle of cuts, then you should at least offer administrators the flexibility to achieve those cuts in a manner that preserves discretion on contracting decisions, which the Administration seems to have done here.

The more troubling—and still somewhat mysterious—elements of the Administration’s emerging contracting policy relate to the thorny issue of “insourcing” previously contracted-out work (or de-privatizing, if you will). The Administration appears to be trying to craft a structured set of policy guidance on when and how to insource and outsource, which seems like a sensible approach from a management perspective. Policymakers should lay out the service delivery options, evaluate each one of them on a rigorous, apples-to-apples basis, and then select the one that makes the most sense after evaluating the decision parameters. No biases or predispositions toward public or private provision—just like the private sector routinely does in making insourcing/outsourcing decisions.

But the devil is always in the details, and next month the OMB will issue guidelines to define “inherently governmental” work, to outline appropriate instances to outsource work and to outline appropriate structures for different sorts of contracts. This guidance will give much more clarification on the Administration’s approach, and the true test will come in the ability to withstand political pressure to expand the definition of “inherently governmental” far beyond the bounds of the common-sense “Yellow Pages test.” For example, in the Federal Times piece, American Federation of Government Employees president John Gage previewed what his union will push for—having the new policy encourage agencies to use federal employees instead of private sector contractors. The Administration should expect much more similar pressure and should push back forcefully.

The other complicating factor sits on Capitol Hill, of course, and a Democrat majority that is seemingly bent on undermining competitive contracting and driving insourcing. However balanced and substantive the Administration’s contracting guidelines are, they will undoubtedly crash into the reality that Congress stands poised to thwart privatization. Thus, the Administration will need to push hard to rein in the anti-privatization tendencies of its colleagues on the Hill for there to be any really hope of implementing a true policy of “competitive neutrality” vis-a-vis the public and private provision of federal services.

Reason Foundation’s Privatization Research and Commentary