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Getting A Leash on Leviathan, Part I

by Robert C. Tauber

It is also my responsibility to look you in the eye and say: 'When $238 million in new revenue becomes a $141-million shortfall, we have to change the way we do business.'

--Gov. Kenny Guinn
State of the State Address

he Chinese symbol for crisis combines the symbol for danger and the symbol for opportunity. It’s an insight highly relevant to Nevada’s current fiscal crisis: Rarely has such an opportunity to bring about sweeping change in state government been put more squarely before a new administration.

At its last official estimate, Nevada’s government was consuming nearly $400 million more to fund the status quo than the state had revenues. Although later estimates for the next biennium have slightly softened the outlook, the long term trend is clear.

The danger of eventual financial disaster is very real, for today’s budget woes reflect not just a current financial problem, but a pernicious congenital defect in the basic nature of government bureaucracy. Left unchecked, bureaucracy will always continue to grow, crushing the fruits of our best energies. And so Nevada’s new governor, in one of his first official acts, has flung his gauntlet across the face of the state leviathan. The duel that will follow will test his strategic leadership. History has demonstrated again and again the tactical cunning and resilience of the bureaucratic beast, and that its instinct for survival is unsurpassed.

Overcoming Nevada’s fiscal crisis will take more than normal CEO business acumen and leadership skills. Nor will a dozen wise men armed with a hundred pounds of staff studies and fiscal reviews suffice. To subdue the beast of the bureaucracy will take a well-placed thrust into the status quo with specially designed tools. I know because as a former senior Defense Department manager and government reform consultant, I have lived, studied, taught and continue to teach the essentials of successfully reforming federal government bureaucracies. It is my hope that this series of articles might show how our governor and reform-minded state legislators could revolutionize state business practices—securing the fiscal integrity of our State for generations to come.

What Must Be Done

What is needed is fundamental transformation of Nevada’s state government. There are three tools which, used together, can produce basic change. The first tool is an energetic competitive sourcing and privatization (CS&P) agenda set forth by the governor. Second are legislative mandates for CS&P and government reform. And lastly, there must be a driving fiscal imperative in terms of budget authority (spending amounts) and accountability. Of the three, the fiscal imperative may be most crucial because ultimately, the only way to effect change in bureaucracies is through the power of the purse. Approached with intelligence, today’s state budget crisis can catalyze the effectiveness of the other tools and bring about real change. Let us now look at each of these three reform devices from the perspective of how they are being implemented at the federal level. Then in next month’s article, we’ll apply the lessons learned from those experiences to develop a reform agenda for the State of Nevada.

An Energetic Executive Agenda

Although notoriously slow in its actualization, the federal government has had in place an executive branch reform initiative for over 30 years. In 1966, the Office of Management and Budget first published OMB Circular A-76, mandating that all department heads look within their agencies for activities deemed not inherently governmental, and "compete" those functions with the private sector based upon lowest cost to the government. In 1979, the OMB supplemented this circular with a handbook that included procedures for competitively determining whether commercial activities (activities deemed not inherently governmental) should be performed in-house, by another federal agency, or by the private sector. That handbook was updated in 1983 and again in 1996 to refine the A-76 process.

Since it is the second-largest line item in the annual federal budget, the Department of Defense (DoD) bore the greatest responsibility to perform these A-76 studies. However, most A-76 efforts were left to the discretion of military commanders to conduct and adjudicate, and until recently, few commanders took the trouble to seize the initiative. In those cases where the competitions were performed, about 50 percent of the functions were outsourced and 50 percent remained within the government. The net cost savings to the government in either case averaged around 20 percent to 30 percent. When the government retained the function, the resulting savings came from streamlined government processes created out of competitive necessity that provided anywhere from 35 percent to 50 percent reductions in manpower. Yet the organizations’ missions were still accomplished effectively.

One would think that with these kinds of savings, the entire A-76 process would have been institutionalized across the board more than a decade ago. But as Ronald Reagan wrote in his autobiography, Ronald Reagan: An American Life, he quickly learned that the first rule of the bureaucracy is: Protect the bureaucracy. President Reagan came to Washington, D.C. to eliminate big government, and most of America was with him—as long as it was someone else’s bureaucracy that got eliminated. This is human nature, because when you get down to the bottom line of outsourcing, you are impacting people’s livelihoods and families. This shows why an energetic CS&P policy by the executive is not enough to bring about the necessary change. He or she must have help, which brings me to the next tool of transformation.

Legislative Mandates

During the last several years, the U.S. Congress has enacted a bevy of laws specifically designed to force by federal statute rudimentary changes in the way the federal bureaucracies conduct their business. For example, the 103rd Congress (1993 –1994) passed a number of laws intended to improve the performance and accountability of federal agencies, especially in the areas of fiscal responsibility, organizational effectiveness and business processes. For now let’s focus on a bill passed last year that will significantly impact competitive sourcing and privatization at the federal level: the Federal Activities Inventory Reform Act (FAIR) of 1998.

During its early draft stages in Congress, this legislation was originally called the "Freedom From Government Competition Act of 1998"—a title more descriptive of the real intentions behind the law. Its fundamental importance is that whereas OMB Circular A-76 is an executive policy that is nice to do, FAIR is law. And while before agency heads could sometimes use the ruse of ruling certain functions "inherently governmental" to disqualify their departments from any A-76 considerations, FAIR specifically defines by federal statute what kinds of functions are and are not inherently governmental. Essentially, only those things that obligate financially or exercise the power of the United States Government are deemed inherently governmental. All other items, says the law, shall be put on a list reported to OMB and Congress annually. And within a reasonable period of time thereafter, those functions on the list shall be competed. Not an option—shall!

Another premise of FAIR is that under A-76, the government has an unfair advantage over private industry in competitions, because its institutional resources are not fully captured in its current cost accounting methods. Thus, during these structurally incomplete competitive reviews, government agencies appear to be the "lowest cost" and so win. The FAIR act, therefore, mandates that in the spirit of recent acquisition reform legislation, future competition decisions shall be under a rule of best value rather than lowest cost. In turn, all costs shall be "realistic and fair" and all costs shall be captured, to include those of collateral business processes, infrastructure, personnel wage and retirement, and all other overhead costs. Once determined, these costs are evaluated in terms of a contestant’s past performance. This provides the equivalent of a "best bang for the buck" best value determination. Because best value determinations will now predominate in outsourcing competitions, government organizations will be forced to look at the total costs of their business processes to be competitive with the private sector.

Once we enter the "process cost" domain, re-engineering of those processes becomes necessary in order to streamline them competitively. Thus, a change in the way in which costs are captured for CS&P drives government re-engineering initiatives that will result in revolutionary business practice innovations—an outcome wholly to be desired. Which leads me to the third tool of transformation, one that is the catalyst for the other two.

A Driving Fiscal Imperative

Absent pressure applied to the purse, the bureaucratic behemoth is always content to lie comfortably in the status quo, occasionally swatting its staff summary sheets at the executive and legislative gnats that from time to time buzz around its head shouting "new reform initiative." All the while, the behemoth grows and devours as it insists that more funds be added to its coffers so it can expand its services and meet the staffing needs of the new "reform" legislation.

For a long time, as far as the Defense Department was concerned, that was standard operating procedure. However, in the last year and a half A-76 has taken on renewed emphasis within the DoD because of serious budgetary disconnects between mission requirements, modernization needs, and the available annual funding authorizations provided by Congress. In today’s military, senior commanders face a Hobson’s choice. They can either modernize at the expense of readiness or they can maintain the capability to fight two simultaneous major regional conflicts at the expense of modernization. There simply isn’t enough money around to meet today’s mission and modernize.

The net effect is that CS&P under A-76 now means survival in terms of spares, modernization and operational readiness. Future Years Defense Plans (FYDP) are already being submitted based upon an expectation that DoD will save at least $6 billion from CS&P through 2003 and another $2 billion every year thereafter. Any non-inherently governmental rice bowl that is being protected from CS&P at the expense of real savings will be summarily smashed for the good of the mission. Although for the DoD the principle is being practiced in the extreme, we in Nevada can take note that it is the driving fiscal imperative in terms of budget authority that has reinvigorated the CS&P initiative.

Moreover, as discussed earlier, the criterion of best value readily translates to a process-based cost accounting system. Within the U.S. Air Force certain command elements are already implementing activity-based costing to gain control of process costs and force work process re-engineering. This means sweeping transformation of the way these elements do their core functions. Once again it is the driving fiscal imperative—this time in terms of budget accountability (process cost accounting methods)—that is forcing modernization of business process design, bringing to bear upon the bureaucracy the full force of all of the other reform initiatives of the executive and legislative branches. The power of the purse to effect sweeping change in the government bureaucracy may be the ninth wonder of the modern world.

This Budget Crisis is a Great Opportunity

Will these concepts work for the State of Nevada? While some problems have resulted in lower savings than originally advertised, by and large these concepts are working within the DoD. Currently completed A-76 studies are resulting in projected savings in costs of 42 percent over the duration of the resulting awards. What’s more, these concepts are working for the City of Indianapolis [see Stephen Goldsmith’s article, this issue, page 22]. My guess is that the State of Nevada falls somewhere between the two. Therefore the answer to whether or not these concepts will work for Nevada is most definitely yes!

This is why the current budget crisis is Nevada’s greatest opportunity to revolutionize our state government’s business processes for the new millennium. Next month, we will look at an agenda for Nevada and see precisely how that can be done. NJ

Robert C. Tauber ( is a government reform expert and consultant. He lives in Las Vegas.


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