Outsourcing: Is it the next big thing or not?

Some analysts forecast an increasing outflow of federal information technology work to private contractors, while others foresee agencies bucking the outsourcing trend because of dissatisfaction with the results. The future of federal outsourcing is unclear, but agencies have begun systematically assessing their employees’ IT skills as they wrestle with the outsourcing question.

In a new outsourcing study, the market research firm Input forecasts a steady flow of federal IT work going to private contractors. Its analysts predict that the annual value of the federal outsourcing market will grow to nearly $18 billion within five years. The company cites the effects of an impending federal IT workforce shortage as older workers retire, the demands of the war in Iraq and a slowdown in federal contract spending as reasons for the increase.

The biggest growth will come in the areas of business process outsourcing and application services, as federal agencies switch to smaller contracts and multisourcing arrangements and away from bigger deals, Input senior federal market analyst Trina Dinavo said.

A self-reinforcing loop is at work in the federal IT outsourcing market, Dinavo said. A contributing factor is agencies’ growing disillusionment with lengthy competitive sourcing procedures required under the Office of Management and Budget’s Circular A-76 rules. Those rules let contractors bid against federal employees for work that is inherently nongovernmental.

“Increasingly, as agencies outsource more core activities, they may not necessarily want to compete business as an A-76 competition when they can multisource to procure needed services at a much faster rate,” Dinavo said.

As lawmakers in the new Congress raise questions about the Bush administration’s competitive-sourcing strategies, agencies will turn more frequently to other forms of outsourcing as the path of least resistance, she said.

But the most important factor causing the outsourcing market to expand from $13.3 billion in fiscal 2006 to $17.7 billion in fiscal 2011 will be a large wave of federal IT workers retiring, Dinavo said.

Federal employee unions and some market analysts, however, say Input’s forecast is off the mark and inconsistent with earlier outsourcing studies.

John Threlkeld, a legislative representative of the American Federation of Government Employees, said Deloitte Consulting reported in 2005 that companies often find that outsourcing is too complex and produces less-than-expected benefits. In many cases, companies have brought their outsourced business back in-house.

Complex trade-offs often outweigh outsourcing’s benefits, according to Deloitte Consulting. Seventy percent of the companies that Deloitte surveyed said anticipated cost savings drove them to outsourcing, but 38 percent of them said they paid additional or hidden costs for services they thought were included in their outsourcing contracts.

The companies that used outsourcing wrestled with trade-offs between service delivery speed and quality of service, and between organizational cohesiveness and improvements in innovation.

Organizations that outsource IT work and the companies that perform the work have conflicting objectives, Threlkeld said. Outsourcing has left the government in worse shape and with less accountability than before the practice became widespread, he said. “Outsourcing is less likely to be a fountain of sparkling wisdom than it is a fetid swamp” of procurement scandals, he said.

Leaders of the new Democratic Congress have signaled their intention to focus on greater government accountability, and officials “will be given to reducing the runaway costs of the fourth branch of government — a vast army of underworked, overpaid contractors,” Threlkeld said. Meanwhile, federal officials say finding reinforcements to replace a retiring workforce is a major concern.

“My highest priority is people — the workforce,” said Shay Assad, director of procurement and acquisition policy at the Defense Department.

Assad is leading a systematic evaluation of DOD’s procurement and acquisition workforce. He said DOD is more interested in knowing employees’ actual skills and competencies than seeing a list of training courses they have taken or certifications they hold.

For the past seven months, DOD and Defense Acquisition University officials have been developing a workforce assessment plan, which they will begin implementing in March at the Defense Logistics Agency, the Defense Information Systems Agency and an unidentified Air Force location.

Workforce worries The shortage of federal acquisition employees has reached a critical stage, said Marcia Madsen, a partner at Mayer Brown Rowe and Maw in Washington, D.C.Madsen led an advisory group of 13 government contracting experts known as the Services Acquisition Reform Act (SARA) panel, which recommended changes in federal contracting.

The dollar value of federal contracts has increased 63 percent since the 2001 terrorist attacks, and new regulations have complicated the acquisition process, but the size of the federal acquisition workforce has remained the same, Madsen said.