Reinventing Federal Procurement

Executive Summary

What happens when a major corporation, headquartered in the Washington
area, wants to buy supplies or other items? For a small purchaseone
under $25,000it needs about four days to process the request with its
purchasing office and select a vendor. For purchases of about $100,000,
it needs from one to four weeks, with the average being two weeks.1 The
company is not encumbered by myriad regulations with minute details on
how it should proceed.

What happens, though, when the area's biggest employer, the federal
government, tries to buy something? Even for relatively small and simple
items, the process is timeconsuming. While small purchases require less
than a month under simplified procedures, larger purchases need much
more time. Even simple procurements under $100,000 require at least
three months, and individual contracts often take much longer. Excessive
bureaucracy and the inability to do smart buying result in high
administrative costs that, in turn, adversely affect the timeliness,
quality, and price of purchased items. Additional effects include
stifled innovation, lower mission performance, and missed chances for
lowering total lifecycle costs.

Does the System Work? To be sure, much of the federal procurement system
works reasonably well in terms of fairness and equity.  Given the
relatively huge volumes of activity and money involved, corruption is
remarkably rare and federal contractors contribute much in value.
Nevertheless, vendors, government managers, procurement professionals,
oversight agencies, the press, and the public are frustrated with the
system.2 The administrative costs are enormousover $7 billion in
salaries and benefits aloneand the time needed to acquire goods and
services is excessive.  Studiesand tales like the one about the
Washington area companyshow that the administrative costs of supplying
the government far exceed comparable costs for private organizations.3

Not infrequently, for instance, a request for proposal on an information
technology (IT) procurement of equipment and software that's sold widely
in the commercial market will run hundreds of pages; the proposals
themselves run thousands of pages. The time required to complete such an
acquisition often exceeds the market life of the technology being
acquired4about 49 months for the federal government, as opposed to 13
for the private sector.5 Private sector documents, meanwhile, are much
shorter and less costly to prepare.

Overall, the federal government buys a huge amount of goods and services
from private vendors. Recent annual expenditures are over $200 billion,
about 15 percent of the federal budgetthat is, $800 per American every
year or, for the nation, about $28,000 every working second of every
working day. If implemented, the National Performance Review's (NPR's)
recommendations for reinventing federal procurement will save an
estimated $22.5 billion from fiscal 1995 to 1999.

NPR recommendations will affect federal costs in two ways. They will
reduce administrative costs by reducing personnel and personnelrelated
expenses, and they will reduce the burdens on vendors doing business
with government, thereby resulting in lower costs for the goods and
services the government purchases.

These estimates reflect $40 billion in savings less $17.5 billion
related to personnel reductions that are reflected in the NPR
Accompanying Report Transforming Organizational Structures.  Estimates
are problematic, however, because the changes involve the entire
procurement culture and system and thousands of federal and business
organizations and people. In addition, procurement spending levels in
future years cannot accurately be predicted. If spending falls
significantly below existing levels, the potential dollars saved could
drop as well.

Think Big, Act Small. The stakes are huge, for the government and the
nation. Over the past several decades, a revolutionary managerial reform
movement has been building momentum in the public and private sectors,
showing no sign of abating. The "new wave" seeks to debureaucratize
bureaucracies, believing we must think big and act small in order to
survive in an increasingly global competitive marketplace. The federal
procurement bureaucracy's excessive rules and regulations clearly place
a heavy burden on the government's successful delivery of services and
on the ability of U.S. companies to stay competitive. Arcane and
outofdate bureaucratic rules seem an end in themselves, not merely a
means to an end. The result is forcing governmental attention inward,
stifling innovation and choking off responsiveness to customers.

In the private sector, procurement has risen from a backoffice, lowlevel
concern to an increasingly strategic corporate one.  Today, few
companies are "vertically integrated"i.e., making everything they use.
Corporate survival depends on "focus," where corporations own only those
resources that give them a competitive advantage in the market. For
everything else, they buy (or "outsource") from suppliers (increasingly
viewed as strategic partners). In a world of focus and outsourcing,
procurement systems indeed become strategic.

Evolution of the Existing Procurement System. History helps to explain
our current system. When John Augustus Roebling built the Brooklyn
Bridge, popular legend tells us that he designed it to endure stress
levels more than 20 times the expected daily levels. Why? Because New
York City procurement systems were supposedly so corrupt, Roebling
feared that materials normally ordered for such construction would fall
short of critical standards. Admittedly, federal procurement systems
have never suffered the same corruption as those in patronageplagued,
late19thcentury New York City. But even today, the assumption underlying
many federal procurement regulations, laws, and policies is similar to
the one Roebling held about New York Citythat everyone is trying to
cheat the government and, thus, every possible circumstance must be
controlled.

In the early 20th century's Progressive Movement, reformers used
bureaucratic tools to control the worst excesses of thenprevalent
political machines. Bureaucratic regulation relied on central budgeting
offices, personnel offices with civil service protection for government
employees, and procurement procedures to ensure relative efficiency and
fairness in purchasing. In later years, the government enacted many
bureaucratic reforms that were so successful, the private sector adopted
them widely.  Today's federal procurement system still has its roots in
Progressive Era reforms.

The system is based on openness and competition, the primary guarantees
of integrity, equity, and efficiency. To ensure that procurements are
open and objective, the government has limited the discretion of its
public officials. In the Defense Department, at least 889 laws affect
procurement. The Federal Acquisition Regulation (FAR) is 1,600 pages,
supplemented by another 2,900 pages of agencyspecific procurement
regulations.  These thousands of pages, along with thousands more of
additional agency instructions and case law involving protests, contrast
sharply with the Australian government's 93 pages of regulations in 13
separate, easytoread guidebooks on procurement.6

Australia reinvented its procurement system on the belief that freeing
good people to make smart business decisions will generate huge
administrative and contract cost savings. Officials believe it has
worked exceptionally well. Our system of excessive laws, regulations,
and overseers is premised on a very different assumptionthat, if given
discretion, line managers and procurement employees will cheat and act
with poor judgment with taxpayer money. The concept of letting managers
get value for money, make smart business decisions, and be accountable
for results remains foreign to our government.

Problems with the Existing System. Our increasingly complex and
bureaucratic procurement rules have given us a larger, but less
productive, procurement workforce. The core procurement workforce
employed across the government grew from 42,000 in 1980 to 67,000 in
1992, while average productivity per contract specialist fell from $9.4
million in 1980 (in 1992 dollars) to only $6.3 million in contract costs
in 1992.7 In fact, the core workforce and related functions (i.e.,
people working in supply depots and other logistics functions) equals
142,000about 6 percent of the total federal workforce!

Generally, federal procurement policies stress prior specification of
needs, competitive bidding, and accountability through external review
and appeals. While procurement personnel do not always automatically
choose the lowcost bidder, they face strong pressure to be as objective
(and defensible) as possible in selecting vendors who aren't the lowest
bidders. The system ensures objectivity by restricting the evaluation to
criteria mandated by the agency's mission and published in advance; by
limiting the information used for evaluation to that submitted by
proposing vendors (lest government exercise bias in selecting
information); and, typically, by placing a heavy emphasis on costs. Many
line managers and procurement professionals believe the system is
designed to protect marginal players in the procurement process and not
allow for good management practices, like rewarding contractors who have
records of excellence. Over the years, and often in response to an
isolated, nonsystemic scandal, the government has imposed further
controls to restrain employee discretion.

Nowhere is the system's failure more glaringly apparent in not meeting
its customers' needs for timely product delivery, at reasonable prices,
and with little red tape, than in purchasing IT products. "What takes
one year for the private sector to do, we're taking four to five years
to do, and the halflife of this stuff is about a year," said former
Internal Revenue Service Commissioner Fred T. Goldberg, Jr. "It's a
process designed to fail."8 Angry customers or Members of Congress have
lambasted nearly every agency contracting official for taking months or
years to deliver obsolete computer products that were available, at a
cheaper price, at a nearby store or from a catalog. To buy a personal
computer through her agency's procurement process, one employee
complained that she needed 23 signatures. "Government is the largest
purchaser of information technology products," said John Sculley, Apple
Computer's former CEO, "and yet it is paying the highest prices and
buying the oldest technology."9

High administrative costs might be justified if they produced superior
results, such as lower product costs, better quality, or some other
desired effect (minority employment, local job development,
environmental protection, etc.). But do they?  According to surveys of
public and private managers and vendors:

-- public managers are far less happy than private managers with their
vendors;

-- vendors often work harder for private clients than public clients
(because government procurement so restricts the use of past performance
in awarding contracts, vendors can "game" the contracti.e., exploit the
rules for shortterm profits rather than build longterm relationships);10
and

-- more vendors, particularly in the technology area, refuse to do
business with the government, or they create separate
organizations/distribution channels to deal with it. In this way, they
insulate the commercial part of the company from the onerous federal
requirements and disclosures and develop specialized people to deal with
the maze of regulations, policies, and procedures.

The government often does not even have access to some of the best,
least expensive products. Companies have voluntarily removed themselves
from the procurement process, or the government only gets access through
specialized people and organizations that, in and of themselves, create
more expensive, less flexible channels. In the case of the IBM Federal
Systems Company, for instance, the government does not get to buy from
the same IBM that deals with other commercial purchasing activities like
those of Ford Motor Company or KMart.

Perhaps procurement's major problem is its hidden cost in hindering
innovation and excellence. Globally, with private and public
organizations undergoing major upheavals and restructuring, innovation
is becoming key to survival.  Outsourcing and electronic commerce are
emerging as strategic issues. In this context, federal practices seem
excessively bureaucratic and obsolete. In private contracting, a major
study concluded, organizations look for reliable suppliers of quality
goods at reasonable prices. But in public contracting, regulations
designed to avoid political favoritism insist on a compartmentalized
bidding process that most companies would find ludicrous. Only rarely
can the government consider, let alone reward, a contractor's successful
past performance when assessing competitive bids for government work.
The result: a system that too often delivers goods too late, at too high
a price, and too inadequate to do the job. Not surprisingly, public
sector buyers are far more frequently dissatisfied than their private
sector counterparts with the performance of their vendors.11

A reinvention agenda. This report presents a comprehensive agenda for
fundamental procurement reform. In some cases, the solutions require
legislation. But most importantly, they require a new direction and
model for organizational controlone that depends on empowered employees
held accountable primarily for external results, not internal rules.
Empowered employees should be freed from excessive laws, all
accompanying regulations, and internal agency barriers that stifle
innovative customer service. The federal procurement system needs to be
recognized as an administrative process that balances the costs of the
system to taxpayers and vendors, the line manager's needs, and the
nation's socioeconomic goals. The law's main role should be to set
public policy goals and sensibly protect the system against fraud.

A procurement system must have more customer service and less
bureaucracy, and be based primarily on getting value for money.  Federal
line managers need responsive, efficient, and innovative procurement
services delivered by procurement officers with whom they can develop a
tested, longterm relationship. Together, line managers and procurement
officers must shift from procurement focusing on regulation for the sake
of regulation to a system balancing value, price, and fairness to
produce a truly costeffective system.

To create such a system, NPR's recommendations for procurement are based
on the following five major themes, which should remain the focus for
continuing change even after each processoriented recommendation is
completed.

1. Move from Rigid Rules to Guiding Principles. Corporations and other
governments have reduced detailed controls, replacing them with broad
guidelines and accountability for results. As we have said, Australia's
new procurement regulations cover only 93 pages. Similarly, the federal
government needs to revamp its procurement policy framework and
legitimize the shift from rules to guiding principles. Along with giving
broader discretion to frontline managers, the government should build a
more professional workforce and encourage innovation. Such changes will
encourage procurement officers and line managers to be accountable to
their customers.

2. Get Bureaucracy Out of the Way. The government should reduce unneeded
burdens and bureaucratic procedures along with adding guiding principles
and accountability for results. For federal procurement, NPR recommends
a new simplified acquisition threshold that also simplifies procurements
from small businesses and small disadvantaged business firms,
streamlines labor provisions, and reforms elements of IT procurements.

3. Give Line Managers More Authority and Accountability. The procurement
professional should work with, not against, the line manager. Managers
should be able to acquire needed tools without going through a
procurement office. Thus, line managers should be allowed to expand
their use of commercially available purchase cards for relatively
smalldollar items. Procurement should focus more on understanding the
customer's needs and identifying the best way to satisfy them. With
these changes, the effectiveness of procurement organizations can then
be measured on results (with input from the customer), as well as
compliance with rules.  Authority and accountability also would be
clarified by revising ethics laws to make them comprehensible and
strengthening their impact, while simultaneously preventing them from
stifling essential communications between vendors and the government.

4. Give Line Managers Expanded Access to Competitive Sources of Supply.
The federal, state, and local governments should be allowed to cooperate
in procurement actions. Federal customers should also be able to use
whichever procurement office can provide the best service.

5. Foster Competition, Commercial Practices, and Excellence in Vendor
Performance. In general, the nation could reap many benefits by moving
federal procurement practices closer to the private sector's best
commercial practices. Elements include the increased use of standard
commercially available products, expanded use of electronic data
interchange and electronic commerce, more emphasis on excellence in
vendor performance, and greater reliance on best value (not just least
cost) procurements.

The federal government can create a system that works based on these
themes. The reinvented procurement system will be much like modern
commercial procurement systems, but also will ensure fairness and the
other social values and goals uniquely important to public procurements.

Although the recommended reforms will produce immediate and appreciable
improvements, they are just the start of a procurement reform process,
not its end. Longterm success will require continued cooperation and
support from all stakeholders:  Congress, the procurement community,
agency line managers, vendors, andmost importantlythe public. These
recommendations should not be viewed on an individual basis; each is not
a significant change in and of itself. They must be seen as part of a
comprehensive view of reforms necessary to produce an efficient and
economic procurement system that serves the line manager, taxpayers, and
strategic partners (vendors), and accomplishes other societal goals in a
wellbalanced manner. This report builds a foundation for this
fundamental reform.

Endnotes

1. Interview with Allied Signal Technical Services Corporation, Space
Operations Group, Columbia, MD.

2. For example, see U.S. Merit Systems Protection Board, Workforce
Quality and Federal ProcurementAn Assessment (July 1992); Acquisition
Law Advisory Panel to the United States Congress, Streamlining Defense
Acquisition Law Report (January 1993); and the Center for Strategic and
International Studies, Integrating Civilian and Military Technologies:
An Industry Survey (April 1993).

3. Center for Strategic and International Studies, p. 16.

4. It is somewhat ironic that the rallying cry of a recent information
technology procurement reform was "Go for 12"hoping against hope that it
would be possible to award a contract within a year after a decision to
proceed with an acquisition; the average length of time required for
large information technology procurements is estimated to be over three
years.

5. See U.S. Department of the Treasury, Internal Revenue Service,
Management Review of the Contracts and Acquisition Division (Washington,
D.C., 1990).

6. See Government of Australia, Department of Administrative Services,
Financial Reform Group, Purchasing Reform Group Guidelines (undated).

7. Interview with Office of Management and Budget, Office of Federal
Procurement Policy staff, Washington, D.C., July 1993.

8. Greve, Frank, "Terminal Idiots," The Washington Monthly (June 1993),
p. 15.

9. Corbin, Lisa, "Technology's Slowing Surge," Government Executive
(August 1993), p. 68.

10. John F. Kennedy School of Government, Information Technology and
Government Procurement (Cambridge, MA: Harvard University, 1992).

11. DiIulio, John J., Jr., Gerald Garvey, and Donald J. Kettl, Improving
Government Performance: An Owner's Manual (Washington, D.C.: Brookings
Institution, July 1993), p. 24.