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Executive Summary



In this study outsourcing is defined as the organizational practice of contracting for services from an external entity while retaining control over assets and oversight of the services being outsourced. In the 1980s, a number of factors led to a renewed interest in outsourcing. For private sector organizations, outsourcing was identified as a strategic component of business process reengineering—an effort to streamline an organization and increase its profitability. In the public sector, growing concern about the federal budget deficit, the continuing long-term fiscal crisis of some large cities, and other factors accelerated the use of privatization 1 measures (including outsourcing for services) as a means of increasing the efficiency of government.

The literature on business management has been focused on the reengineering of business processes in the context of the financial, management, time, and staffing constraints of private enterprise. The underlying premises of business process reengineering are: (1) the essential areas of expertise, or core competencies, of an organization should be limited to a few activities that are central to its current focus and future profitability, or bottom line; and (2) because managerial time and resources are limited, they should be concentrated on the organization's core competencies. Additional functions can be retained within the organization, or in-house, to keep competitors from learning, taking over, bypassing, or eroding the organization's core business expertise. Routine or noncore elements of the business can be contracted out, or outsourced, to external entities that specialize in those services.






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Page 1 Executive Summary In this study outsourcing is defined as the organizational practice of contracting for services from an external entity while retaining control over assets and oversight of the services being outsourced. In the 1980s, a number of factors led to a renewed interest in outsourcing. For private sector organizations, outsourcing was identified as a strategic component of business process reengineering—an effort to streamline an organization and increase its profitability. In the public sector, growing concern about the federal budget deficit, the continuing long-term fiscal crisis of some large cities, and other factors accelerated the use of privatization 1 measures (including outsourcing for services) as a means of increasing the efficiency of government. The literature on business management has been focused on the reengineering of business processes in the context of the financial, management, time, and staffing constraints of private enterprise. The underlying premises of business process reengineering are: (1) the essential areas of expertise, or core competencies, of an organization should be limited to a few activities that are central to its current focus and future profitability, or bottom line; and (2) because managerial time and resources are limited, they should be concentrated on the organization's core competencies. Additional functions can be retained within the organization, or in-house, to keep competitors from learning, taking over, bypassing, or eroding the organization's core business expertise. Routine or noncore elements of the business can be contracted out, or outsourced, to external entities that specialize in those services.

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Page 2 Public-sector organizations, in contrast, have no bottom line comparable to the profitability of a business enterprise. The missions of governmental entities are focused on providing services related to public health, safety, and welfare; one objective is to do so cost effectively, rather than profitably. Thus, public practices are often very different from private-sector practices. They entail different risks, different operating environments, and different management systems. Private corporations and the federal government have invested billions of dollars in facilities and infrastructure to support the services and activities necessary to fulfill their respective businesses and missions. Until the corporate downsizings of the 1980s, owners of large inventories of buildings usually maintained in-house facilities engineering organizations responsible for design, construction, operations, and project management. These engineering organizations were staffed by hundreds, sometimes thousands, of architects and engineers. In the United States during the last 20 years, almost all of these engineering organizations have been reorganized, sometimes repeatedly, as a result of business process reengineering. Some organizations are still restructuring their central engineering organizations, shifting project responsibilities to business units or operating units, and outsourcing more work to external organizations. Studies have found that many companies are uncertain about the appropriate size and role of their in-house facilities engineering organizations. Reorganizations sometimes leave owners inadequately structured to develop and execute facility projects. In many organizations, the technical competence necessary to develop the most appropriate project to meet a business need has been lost, along with the competency to execute the project effectively. Even though many owner organizations recognize that the skills required on the owner's side to manage projects has changed dramatically, they are doing little to address this issue. Federal agencies are experiencing changes similar to those affecting private-sector owner organizations. A survey by the Federal Facilities Council found that by 1999, in nine federal agencies, in-house facilities engineering staffs had been reduced by an average of 50 percent. The loss of expertise reflected in this statistic is compounded by the fact that procurement specialists, trained primarily in contract negotiation and review rather than in design and construction, are playing increasingly greater roles in facility acquisitions. Outsourcing is not new to federal agencies. The government has contracted for facility planning, design, and construction services for decades. Recently, however, in response to executive and legislative initiatives to reduce the federal workforce, cut costs, improve customer service, and become more businesslike, federal agencies have begun outsourcing some management functions for facility acquisitions. The reliance on nonfederal entities to provide management functions for federal facility acquisitions has raised concerns about the level of control, management responsibility, and accountability being transferred to nonfederal service providers. Outsourcing management functions has also raised concerns

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Page 3 about some agencies' long-term ability to plan, guide, oversee, and evaluate facility acquisitions effectively. To address these concerns, the sponsoring agencies of the Federal Facilities Council requested that the National Research Council (NRC) develop a guide, or “road map,” to help federal agencies determine which management functions for planning, design, and construction-related services may be outsourced. In carrying out this charge, the NRC committee appointed to prepare this report was asked to: (1) assess recent federal experience with the outsourcing of management functions for planning, design, and construction services; (2) develop a technical framework and methodology for implementing a successful outsourcing program; (3) identify measures to determine performance outcomes; and (4) identify the organizational core competencies necessary for effective oversight of outsourced management functions while protecting the federal interest. DETERMINING WHICH MANAGEMENT FUNCTIONS MAY BE OUTSOURCED BY FEDERAL AGENCIES The committee reviewed federal legislation and policies related to inherently governmental functions—a critical determinant of which activities federal agencies can and cannot outsource. An inherently governmental function is defined as one that is so intimately related to the public interest that it must be performed by government employees. An activity not inherently governmental is defined as commercial. The committee concluded that, although design and construction activities are commercial and may be outsourced, management functions cannot be clearly categorized. In the facility acquisition process, an owner's role is to establish objectives and to make decisions on important issues. Management functions, in contrast, include the ministerial tasks necessary to accomplish the task. Based on a review of federal regulations, the committee concluded that inherently governmental functions related to facility acquisitions include making a decision (or casting a vote) pertaining to policy, prime contracts, or the commitment of government funds. None of these can be construed as ministerial functions. The distinction between activities that are inherently governmental and those that are commercial, therefore, is essentially the same as the distinction between ownership and management functions. Using Section 7.5 of the Federal Acquisition Regulations as a basis, the committee developed a two-step threshold test to help federal agencies determine which management functions related to facility acquisitions should be performed by in-house staff and which may be considered for outsourcing to external organizations. The first step is to determine whether the function involves decision making on important issues (ownership) or ministerial or information-related services (management). In the committee's opinion, ownership functions should be performed by in-house staff and should not be outsourced.

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Page 4 For activities deemed to be management functions, the second step of the analysis is to consider whether outsourcing the management function might unduly compromise one or more of the agency's ownership functions. If outsourcing of a management function would unduly compromise the agency's ownership role, then it should be considered a “quasi”-inherently governmental function and should not be outsourced. Figure ES-1 is a decision framework developed by the committee for federal agencies considering outsourcing management functions for facility acquisitions. This framework recognizes the constraints of inherently governmental functions and incorporates the committee's two-step threshold for identifying ownership functions that should be performed by in-house staff and management functions that can be considered for outsourcing. The decision framework is not intended to generate definitive recommendations about which management functions may or may not be outsourced or in what combination. The decision framework is a tool to assist decision makers in analyzing their organizational strengths and weaknesses, assessing risk in specific areas based on a project's stature and sensitivity, and, at a fundamental level, questioning whether or not a management function can best be performed by in-house staff or by an external organization. The line between inherently governmental functions and commercial activities or between ownership and management functions, can be very fine. Distinguishing between them can be difficult and may require a case-by-case analysis of many facts and circumstances. FEDERAL EXPERIENCE WITH THE OUTSOURCING OF MANAGEMENT FUNCTIONS The authoring committee received briefings from several federal agencies and developed and distributed a questionnaire to sponsoring agencies of the Federal Facilities Council to solicit information on their experiences with outsourcing in general and outsourcing of management functions in particular. Seven of the 13 agencies that responded to the questionnaire had outsourced some management functions for planning, design, and construction-related activities. The primary factors cited for outsourcing management functions were lack of in-house expertise and staff shortages (54 percent of responses combined); savings on project delivery time (15 percent); and, other factors, including statutory requirements (15 percent). None of the seven agencies cited cost effectiveness or deliberate downsizing as a factor in the decision to outsource management functions. Three of the seven had outsourced management functions to other federal agencies. Their experiences varied and no trends could be determined. Agencies' experiences with outsourcing management functions to the private sector were also varied, and, again, no trends could be discerned.

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Page 5 ~ enlarge ~ FIGURE ES-1 Decision framework for outsourcing management functions.

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Page 6 ORGANIZATIONAL CORE COMPETENCIES At any one time, a federal agency may be responsible for managing several dozen to several hundred individual projects in various stages of planning, design, and construction. In some cases, agencies acquire facilities with the intent of owning and managing them directly. In other cases, agencies only require the use of facilities and may use a procuring entity to represent the government-as-owner in the acquisition process. A few agencies provide facilities for other agencies and organizations as a key component of their missions. Core competencies constitute an organization's essential area of expertise and skill base. Unless a federal agency's mission is to provide facilities, facility acquisition and management are not core functions (i.e., facilities are not the mission but support accomplishment of the mission). However, when acquiring facilities, federal agencies assume an ownership responsibility as a steward of the public's investment. The requirements that a federal agency be accountable for upholding public policy and for committing public resources are indivisible. This combination of responsibilities requires that any federal agency that acquires facilities have the in-house capabilities to translate its mission needs directly into program definitions and project specifics and otherwise act in a publicly responsive and accountable manner. Other organizational core competencies required to direct and manage specific projects vary, depending on the agency's role as owner, user, or provider of a facility. IMPLEMENTING A SUCCESSFUL OUTSOURCING PROGRAM Once a decision has been made to outsource some or all management functions for facility acquisitions, the agency should clearly define the roles and responsibilities of all of the entities involved. The committee recommends that federal agencies establish and apply a responsibilities-and-deliverables matrix similar to the example shown in Figure ES-2 to help eliminate overlapping responsibilities, ensure accountability, and ensure that, as problems arise, solutions are managed effectively. DETERMINING PERFORMANCE OUTCOMES A key element of an organization's decision making is measuring the effectiveness of those decisions, both qualitatively and quantitatively. When management functions for facility acquisitions are outsourced, the principal measures of effectiveness of the entire effort and of individual projects should relate to cost, schedule, and safety of the projects, as well as the functionality and overall quality of the acquired facilities. If baseline levels of service already exist or can be developed empirically, comparing the metrics and determining how well the outsourcing effort meets the

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Page 7 ~ enlarge ~ FIGURE ES-2 Example of a responsibilities-and-deliverables matrix. Note:  P = primary responsibility A = approve (signing of approval) C = concurrence R = reviews (no response required) S = support (uses own resources)

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Page 8 basic level of expectation should be straightforward. If no baseline exists, one should be developed to ensure effective performance measurement. Individual performance measures should be developed by the agencies that will use them and should not be prescribed by higher levels of government. Although it is entirely appropriate that operational guidance requiring the use of performance measures to be addressed be promulgated government-wide (e.g., Government Performance and Results Act) and to specify what these measures should address, the parties actually responsible for the provision of a service are in the best position to determine what constitutes good performance. Any agency that decides to outsource management functions for planning, design, and construction services should be prepared to develop and apply meaningful, measurable performance measures to determine if it is meeting its stewardship responsibilities. FINDINGS AND RECOMMENDATIONS The primary objective of this study is to develop a guide that federal agencies can use in the initial stages of decision making concerning the outsourcing of management functions for planning, design, and construction-related services. Agencies will have to expand and extend the guidance in this report and tailor it to their individual circumstances. By using the decision framework, by noting the findings, and by following the recommendations presented below, the committee believes federal agencies will be in a stronger position to formulate rational, business-like judgments in the public interest concerning the outsourcing of management functions for planning, design, and construction-related services. Findings Finding. Each federal agency involved in acquiring facilities is accountable to the U.S. government and its citizens. Each agency is responsible for managing its facilities projects and programs effectively. Responsibility for stewardship cannot be outsourced. Finding. The outsourcing of management functions for planning, design, and construction-related services by federal agencies is a strategic decision that should be considered in the context of an agency's long-term mission. Finding. The outsourcing of management functions for planning, design, and construction services has been practiced by some federal agencies for years. Management functions have been outsourced either to other federal agencies or the private sector. The outcomes of these efforts have varied widely, from failure to success.

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Page 9 Finding. At different times, an agency may fill one or more of the role(s) of owner, user, or provider of facilities. Finding. Key factors in determining successful outcomes of outsourcing decisions include clear definitions of the scope and objectives of the services required at the beginning of the acquisition process and equally clear definitions of the roles and responsibilities of the agency. Owners and users need to provide leadership; define scope, goals, and objectives; establish performance criteria for evaluating success; allocate resources; and provide commitment and stability for achieving the goals and objectives. Finding. Program scope, definition, and budget decisions are inherently the responsibilities of owners/users and should not be outsourced. However, assistance in discharging these responsibilities may have to be obtained by contracting for services from other federal agencies or the private sector. Finding. The successful outsourcing of management functions by federal agencies requires competent in-house staff with a broad range of technical, financial, procurement, and management skills and a clear understanding of the agency's mission and strategic objectives. Finding. Performance measures are necessary to assess the success of any outsourcing effort. Finding. Because federal facilities vary widely, and because a wide range of new and evolving project delivery systems have inherently different levels of risk and management requirements, no single approach or set of organizational core competencies for the acquisition of federal facilities applies to all agencies or situations. Finding. The organizational core competencies necessary to oversee the outsourcing of management functions for projects and/or programs need to be actively nurtured over the long term by providing opportunities for staff to obtain direct experience and training in the area of competence. The necessary skills will, in part, be determined by the role(s) the agency fills as owner, user, and/or provider of facilities. Recommendations Recommendation. A federal agency should analyze the relationship of outsourcing decisions to the accomplishment of its mission before outsourcing management functions for planning, design, or construction services. Outsourcing for

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Page 10 services and functions should be integrated into an overall strategy for achieving the agency's mission, managing resources, and obtaining best value or best performance for the resources expended. Outsourcing of management functions should not be used solely as a short-term expedient to limit spending or reduce the number of in-house personnel. Recommendation. Federal agencies should first determine their role(s) as owners, users, and/or providers of facilities and then determine the core competencies required to effectively fulfill these role(s) in overseeing the outsourcing of management functions for planning, design, and construction services. Recommendation. Once a decision has been made to outsource some or all management functions, a responsibilities-and-deliverables matrix should be established to help eliminate overlapping responsibilities, provide accountability, and ensure that, as problems arise, solutions are managed effectively. Recommendation. Agencies that outsource management functions for planning, design, and construction services should regularly evaluate the effectiveness of the outsourcing effort in relation to accomplishment of the agency's mission. Recommendation. Agencies should establish performance measures to assess accomplishments relative to the objectives established for the outsourcing effort and, at a minimum, address cost, schedule, and quality parameters. Recommendation. Owner/user agencies should retain a sufficient level of technical and managerial competency in-house to act as informed owners and/or users when management functions for planning, design, and construction services are outsourced. Recommendation. Provider agencies should retain a sufficient level of planning, design, and construction management activity in-house to ensure that they can act as competent providers of planning, design, and construction management services. Recommendation. Agencies should provide training for leaders and staff responsible for technical, procurement, financial, business, and managerial functions so that they can oversee the outsourcing of management functions for planning, design, and construction effectively. Recommendation. Interagency coordination, cooperation, collaboration, networking, and training should be increased to encourage the use of best practices and improve life-cycle cost effectiveness in the delivery of federal facilities.