March 29, 2011

A Personal Perspective on Acquisition Reform's Unfinished Agenda

James F. Hinchman

James F. Hinchman is Principal Assistant Comptroller General of the United States. The article is based on the Annual Alan E. Peterson Lecture presented at the Section’s Annual Meeting, August 5, 1997, San Francisco.

In his new book, The Tides of Reform, Paul Light describes four kinds of reform efforts that have washed over the federal establishment in successive waves, all with the goal of making management of the federal government more effective, but each with a different set of ideas about how to achieve reform.

One wave, called "scientific management," focuses on the efficiency of government management, relying on the principle that sound public administration depends on organizational structure and rules. This is the reform agenda of the Brownlow and First Hoover Commissions and their intellectual heirs. The second wave, the "war on waste," uses audits and investigations to identify waste and promote economy in government, i.e., qui tam litigation, inspectors general, and congressional hearings on fraud and abuse. The third wave, called "watchful eye," focuses on the use of citizens rights, procedural guarantees, and access to information to promote fairness in government. It is this reform effort, Light says, that gave us the Administrative Procedure Act and the 1989 ethics legislation. The fourth wave, labeled "liberation management," encompasses current efforts to adopt performance-based management in the federal government, increase managerial discretion, and encourage public-private competition for tasks, all in the interest of improving government performance. Vice President Gore's National Performance Review rides this tide.

I do not fully share Professor Light's view that successive reform efforts can be categorized as just one of the four types he describes. It seems to me that reform efforts are often a mixture of the four. But Professor Light is clearly right about two important things. First, we have been in the business of reforming the management of the federal government virtually since the founding of the Republic. The Continental Congress appointed the first inspector general and President Jefferson sought to dismantle the complex centralized administrative structures created by his Federalist predecessors. There is a kind of permanent reform effort and therefore an unfinished reform agenda throughout our political culture. Second, although the goal of reform efforts has been more effective government, we have different ideas about what effective government means and how to achieve reform. More fundamentally these reform efforts are grounded in a number of different values, like economy, efficiency, and fairness.

What Is the Unfinished Reform Agenda?

So the question is not whether it is time for reform–it always is in America. The question is what is currently on the unfinished reform agenda. The answer to that question requires us to look at where we are in relation to all those ideas about what reform means and our underlying values.

Without claiming any special expertise, I would like to share a few thoughts about the most immediate issue in the acquisition management portion of today's unfinished government reform agenda. Within the last few years there has been an enormous increase in the flexibility and discretion available to agencies in the source selection and contract formation process. Professor Light's "liberation management" reform wave, typified by deregulation and privatization, is an apt description of this increase in flexibility and discretion. This reform is the result of major statutory and regulatory changes:

The Federal Acquisition Streamlining Act has given statutory sanction to the use of task and delivery order contracts and established a preference for multiple awards.

The Clinger-Cohen Act of 1996 repealed the Brooks Act, abolished the GSBCA information technology (IT) protest jurisdiction, provided for the use of multiagency contracts for IT, and authorized special simplified procedures for commercial items up to $5,000.

The proposed rewrite of Federal Acquisition Regulation (FAR) Part 15 will create a process that substantially increases the discretion of contracting officials.

The military services have been given new authority to use so-called other transactions to acquire weapon systems prototypes.

The Federal Aviation Administration now has authority to set up its own procurement system outside of the FAR, and there are proposals to create a number of "performance based organizations" that would be exempt from many procurement rules.

There is much to recommend the direction of the recent statutory and regulatory changes. The acquisition system has over recent decades fallen victim to increasing complexity and rigidity.

As the government has moved toward performance-based management, managers have urged greater flexibility in the system as the quid pro quo for greater performance accountability. Clearly their pleas have found a ready audience in both the executive branch and Congress.

Balance of Views

However, a more flexible and responsive system needs to be pursued without forgetting that the system must also embody the other important values that past reform efforts have brought to it. The government's acquisition system must have a framework that balances these ideas and values and establishes an orderly regime for the conduct of the government's contracting business. There must be a set of shared expectations and common understanding about how the system ought to operate. These expectations provide guidance to government contracting personnel about how to carry out their responsibilities and provide contractors a reasonable basis–not a guarantee–on which to make business decisions concerning contracting opportunities. They promote stability and efficiency. The framework does not have to be as complex or as legalistic as the system we have developed over the last few decades. But I believe we need to be concerned that the recent statutory and regulatory changes have left us with some weaknesses in this framework.

These weaknesses are essentially the consequence of failing to understand how agencies and contracting officers will use the broad discretion they have been granted or the limits of their discretion. There are lots of examples, many can be drawn from the meetings and programs of the Section of Public Contract Law.

Some of you have heard me say how important it is that the source selection process be both fair and transparent in order to promote rational source selection on the basis of merit, prevent fraud and abuse, and increase public trust in government decision making. There was basis for real concern that early drafts of the pending FAR Part 15 were so focused on agency and contracting officer discretion that they ignored these important system values. I believe the new draft of the rewrite reflects real improvement in this area, but we still have work to do on this issue.

Past performance is another good example. Possibly the biggest change in source selection in recent years has been the weight given to an offeror's past performance. We recently saw past performance amount to 50 percent of the selection criteria for a multibillion dollar missile procurement, and a weight of 75 percent is not unusual. At the same time, GAO has received and sustained a growing number of past performance protests. This is true largely, I believe, because we don't have a common understanding of what a performance measurement system should be.

Another example is the dramatic liberalization of the rules for using the GSA schedules. The use of both the schedules and indefinite delivery, indefinite quantity (IDIQ) contracts has mushroomed. As a result, our traditional understanding of what constitutes sufficient competition for a specific agency requirement seems no longer valid, a new understanding has yet to be articulated.

There are other examples, like the growing use of "other transactions," which are essentially contracts essentially freed of all of the rules. As the use of other transactions to buy weapon system prototypes has become more widespread, contractors fear that they will be placed at unreasonable risk. The government, too, is uneasy. The IG and DCAA have launched a review of these transactions through contractors whose records are otherwise available to DCAA. We do not have an orderly regime that guides the expanded use of these "other transactions."

Small Business and the Federal Acquisition System

We also have some special problems to work through regarding concerns of small business about their participation in the federal acquisition system. The numbers show little change in the dollar value of prime contracts awarded to small businesses between 1993 and 1996, the last year for which statistics are available. There is even a small increase in the dollar value of subcontracts. Nonetheless, members of the small business community are worried about their future as prime contractors of the government. I believe their concern flows from uncertainty about the impact increased contracting officer discretion will have on them, and a fear that increasing use of GSA schedules, IDIQ contracts, the new small purchase procedures, and prime vendor and consolidated contracts will diminish their business opportunities in the long run. It is true that FACNET, which was supposed to be of particular value to small businesses, is not working as intended. Obviously Adarand has undermined our common understanding of the role of economically and socially disadvantaged small businesses in government procurement Our commitment to fairness as one of the values of the acquisition system has historically included a commitment to assuring small businesses a fair opportunity to be government contractors. We need to continue to monitor this situation and look for ways to reflect the system's commitment to small business while still pursuing the goals of the recent legislative and statutory changes.

Addressing these issues and problems is I think the most immediately pressing matter on the reform agenda. If we can complete this agenda, we will have gone a long way toward assuring successful implementation of the recent statutory and regulatory changes. We will have advanced the goals of those changes and at the same time remained faithful to all the values of the acquisition system and strengthened the orderly regime necessary for the conduct of the government's contracting business. This is not an easy job, nor will it be done quickly. But it is possible.

Other Reform Problems

Let me mention two other issues of particular concern to the reform agenda. First, it is difficult to ignore the issues raised by the unprecedented vertical and horizontal consolidation we are witnessing in the defense contractor community. There are good reasons for this consolidation. Nevertheless, we face the prospect of something like a quarter of all government contract dollars, both military and civilian, going to three firms. More importantly, we can anticipate that we will have limited competition at best in the development and manufacture of many major weapons systems and in some other areas as well.

In the areas where this problem is most acute, the government needs policies that temper its reliance on market forces to protect its interests with a realistic appreciation of how those forces can be distorted in the absence of sufficient competition. There have been a lot of suggestions about what to do, such as contract splitting, direct acquisition of components, and even purchases from foreign suppliers, but there is obviously a lot of work to be done here.

Second, I believe that the reform agenda has been too focused on source selection and contract formation. We need to shift to what we lawyers call contract management, by which we mean all the policies, systems, and processes that are involved in the relationship between the government and its contractors in connection with contract performance and payment. When we get there, I believe we will find that the problems relate to both policy and capacity. Agencies and DoD components do not have shared goals and objectives, much less goals and objectives shared with contractors. Many agencies do not have the financial and other systems needed to support sound contract administration. We need to worry that in the midst of its downsizing the government is not investing enough in the recruitment and training of its contract management personnel. And I suspect there are opportunities for significant process reengineering. But these things are all agendas for another day.