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Don't Believe the Hype on Federal "Insourcing"

Leonard Gilroy
November 12, 2009, 5:30pm

Get ready for some spin from the White House on the supposed cost savings of insourcing (or de-privatizing) federal work, writes Professional Services Council president Sam Soloway in an excellent column at Washington Technology. As Soloway notes, these claims will have been based on fuzzy math that utterly underestimates the government's true costs of doing business:

When President Barack Obama's budget goes to Congress next February, the Defense Department and other agencies will announce budget savings that have been achieved from insourcing. Unfortunately, most of those savings also will be largely illusory.

The military departments already have told their field activities that for every insourced position, a 30 to 40 percent savings is being included in the fiscal 2011 budget. Furthermore, each activity has been given an insourcing target to achieve. As a result, we are seeing more arbitrary insourcing of purely commercial activities, rather than a focus on the critical skills the government most needs.

However, the process of accounting for those savings simply does not capture the total costs of a federal employee, including salary, benefit, and all the attendant support systems required for each employee. Thus, the savings are based on fuzzy math at best. If an Air Force organization insources a support services contract, it might look like such action generates savings for the organization’s budget. But this tells little about the total costs that are paid out of other budgets to cover expenses such as construction and infrastructure, pay and personnel systems and offices, travel systems, training and development, and cell phones and laptops. Those expenses are essentially invisible and perceived as free to the unit commander.

Some argue that government agencies are factoring in those costs in their budgets. Although no one has been willing to disclose publicly the algorithms they are using — and we have asked for them — it is interesting that in a July letter to 11 members of Congress who raised questions on this topic, a senior Defense Department official said more detailed cost guidance would be issued this fall, long after the budget assumptions were made and the insourcing directives issued to the field.

Read the whole thing for a glimpse at bad public policy in the making. And this gaming of the numbers is in no way unique to the Obama administration. In fact, it's Tactics 101 from the anti-privatization playbook—use the labrynthine nature of the bureaucracy and budget to shuffle/obfuscate the all-in costs of public service delivery in an effort to justify an avoidance of competition. In short, assume away those costs (pensions, retiree health care obligations, overhead, facility maintenance, etc.) that are paid outside of an agency's direct budget. This creates an apples-to-oranges situation, as the private sector has to factor those all-in costs in its bids. I recently wrote on a similar example in Oklahoma corrections here and here.

This is why a sound privatization program must rely on evaluation systems and methodologies to get as close as possible to an apples-to-apples, public-vs-private comparison. Of course, this is based on the notion that policymakers actually have an obligation to taxpayers to get the best value possible for taxpayers' money.

Unfortunately, the federal government does not yet have a sound privatization program—nor does it seem to elevate value for taxpayer money to a central pursuit (or even a minor pursuit, for that matter). Hence politics, not sound policy, drive decisions that lead to arbitrary insourcing mandates and a massive expansion of the costly federal workforce. And of course, taxpayers will lose in the end, even as they're being told they've gotten a win through insourcing.

Taxpayers should read Soloway's column and ask themselves: is this the way you want your government to make decisions?

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Privatization Research and Commentary


Leonard Gilroy is Director of Government Reform


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