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A Conversion Guide

November 1997

Second Draft Addition


Table of Contents



What is a Performance-Based Organization?

A PBO is a discrete management unit with strong incentives to manage for results. It commits to specific measurable goals with targets for improved performance. In exchange, it is granted managerial flexibilities to achieve these targets.

What Are the Prerequisites for Becoming a PBO Candidate?

Essential Components of a Fully Operational PBO

Planning and Goals

Chief Operating Officer

Flexibility and Accountability

(1) specifies the organization's boundaries (e.g., policy/operations split),

(2) outlines cooperative relationships with the parent department and other agencies (e.g., cross-


(3) outlines the administrative flexibilities granted (e.g., departmental and central

management agencies) that support improved performance, and

(4) outlines the legislative flexibilities sought/granted.


This guide is intended to help federal entities interested in becoming performance-based organizations. Since this concept is new, this guide is meant to be descriptive, not prescriptive.

The guide is targeted at two audiences -- agency leaders and agency technical specialists in areas such as personnel and procurement. The overview and appendices A, B and F will be of interest to agency leaders because they explain the general framework for a Performance-Based Organization, provide the legislative language that can be used to develop a PBO proposal, and describe the role of the Chief Operating Officer. Appendices C, D, and E are more technical and provide detailed information on management flexibilities available in personnel, procurement, and support services.

As the PBO concept evolves, the National Performance Review will periodically update this guide based on the practical experience of those who are trying to make it happen. For example, as they evolve, we will provide additional information on the issues related to congressional involvement, the relationship between a PBO and its parent department, and provide examples of completed performance agreements and framework documents.

This guide is a collaborative effort between NPR, OMB, OPM, OFPP, GSA, and other contributors. The model legislation has been cleared through the interagency legislative review process; the personnel flexibilities were prepared by OPM, the procurement flexibilities by OFPP, the support service flexibilities by GSA, and the appendix on the role of the chief operating officer, by a team at the Commerce Department. Updates to this guide will be posted on NPR's Internet homepage ( Look under "Initiatives," and then under "Performance-Based Organizations."


In September 1995, Vice President Al Gore announced that a series of agencies would be transformed into performance-based, customer-oriented agencies. This effort builds on an existing framework of initiatives intended to reorient government agencies from being focused primarily on what resources they get, to what they hope to accomplish with their resources.

The Vice President reiterated his proposal in a speech in March 1996, suggesting that this would be a key tool for agencies as they face managing in a balanced budget era of decreasing resources. President Clinton proposed eight agencies as initial candidates in his FY 1997 budget and supported the concept during his reelection campaign, saying that in his second Administration: "We want hundreds of organizations to become performance-based, to be trailblazers in increasing productivity and making their customers happy." The President's FY 1998 Budget continues this commitment.


Over the years, people have said, "Let's make the government run like business." That's usually meant sticking a businessman with no government experience in charge of a government agency. The players changed, but the rules of the game did not. And by and large, neither did the results. These poor results then uncorked more rhetoric about how the government needed to become more businesslike.

The reality is that government is not a business. Making policy and enforcing regulations are things only governments do. They can't be measured by business standards. But some government functions can be measured by business-like standards. Functions such as processing patent applications, issuing benefits, and making guaranteed housing loans to modest income home buyers. These are clearly government functions that should be given the opportunity to operate more like a top-notch business would. However, the existing systems of government often impede them from doing so. This Administration wants to change that. And that's what Performance-Based Organizations will do.

What's Been Done to Date?

The groundwork has been laid in the past three years for creating Performance-Based Organizations through a series of important advances such as the passage of the Chief Financial Officers Act (CFO), the Government Performance and Results Act (GPRA), and the Government Management Reform Act (GMRA), increased flexibilities through procurement reform, and the issuance of financial standards.

President Clinton's 1998 Budget identifies nine candidates for Performance-Based Organizations (PBOs). These candidates are developing and sending to Congress their needed legislative changes to allow the conversions. Congress held a hearing on the concept, where it received support from a range of witnesses, in July 1997. Model legislation used to craft their legislation is contained in this conversion guide at Appendix A. Additional candidates will continue to be solicited through the President's Management Council.

What Is a Performance-Based Organization?

A PBO is a discrete management unit with strong incentives to manage for results. It has three characteristics. First, it commits to accountability for results by having clear objectives, specific measurable goals, customer service standards, and targets for improved performance. In exchange, it can be granted managerial flexibilities to achieve these aims and goals in areas such as personnel, procurement, financing, and real property.

Second, to ensure a management focus, primary responsibility for policy making is separated from program operations and remains in the domain of the Department under the control of political appointees. Program operations are retained in the PBO. While this division of responsibilities will not always be distinct, the managers of the PBO will continue to operate within the structure of the organization's present Department to ensure communication between the policy formulation and operation functions. Separating policy decisions affecting those operations from daily activities creates strong incentives within the PBO to manage for results by committing to clear objectives, specific measurable goals, customer service standards, and targets for improved performance.

And third, a PBO is led by a Chief Operating Officer (COO) hired for a fixed term based on a demonstrated track record of effective management, as distinguished from policy expertise. The COO might come from the private sector or from the ranks of the civil service. The COO position should provide the balanced between the problems associated with short-term tenures of most political appointees, yet without the problems associated with permanent career tenure. The COO would sign an annual performance agreement with the Secretary; and his or her compensation and tenure would be tied to the organization's performance. The Secretary may reappoint the COO to subsequent terms, if he or she has met organizational and individual performance goals.

Not all government functions may be suited to become a Performance-Based Organization. Agencies or functions that do not have clear, measurable results should be excluded. For example, the foreign policy and planning functions in the State Department or the Office of Science and Technology may not may not be appropriate candidates. Similarly, functions that develop regulatory policy may not be appropriate candidates.

Why Become a PBO?

A PBO creates incentives for policy makers to align an organization's operational functions with the Government Performance and Results Act (GPRA) in helping them perform their mission. It is an additional way to achieve their goals and get results. In addition, it can help an agency:

The conversion to a PBO also provides many of the advantages that have previously encouraged agencies to seek corporation status. Many agencies have sought government corporation status in the past because that was often perceived to be the sole administrative vehicle to obtain broad managerial flexibilities. But the government corporation model also requires the organization be financially self-sustaining and often leads them to believe they have independent organizational and policy authority, separate from executive branch oversight. It generally creates a board outside the purview of most executive branch policy channels. These features have been disincentives for the liberal creation of government corporations. However, the PBO structure is an alternative that avoids these characteristics.

Does This Work?

The General Accounting Office has examined this concept over the past few years and in reports in 1995 and 1997, supported it as a useful approach to providing more flexibility in exchange for greater accountability for achieving results. While in a different setting, foreign experiences with creating organizations similar to PBOs show that customer service can be maintained or improved with fewer resources by creating organizations that have strong incentives to perform and reduce costs. Creating a contractual relationship sharpened the intended results of program activities and increased accountability for results. These countries found that by clearly defining results, policymakers were less inclined to attempt to control programmatic inputs. In addition, increasing accountability for performance allowed managers to make a case for being granted greater flexibility in meeting results.

The British government, for example, undertook an approach similar to PBOs beginning in 1988, called "Next Steps" agencies. Its experience is worth building on. After eight years, the British Next Steps initiative has allowed its agencies to save around 4 percent on their planned operating costs for the year -- while improving service delivery. The British have converted more than 130 agencies -- roughly three-quarters of their government. In doing so, the British increased the quality of service or cut costs. For example, its Patent Office reduced the cost of its common services -- such as personnel, real estate leases, and supplies -- by 39 percent between 1992 and 1995, in part by creating incentives to move operations to a lower cost area of the country. In addition, it improved on its goal of issuing patent search reports within a 12-week period from 84 percent of the time to 92 percent of the time. Its Passport Office cut its operating costs 3 percent a year over the past four years, yet at the same time it improved its processing of passports from 3.5 weeks to 6.7 days. And, its Coast Guard responded to 99 percent of emergency calls within 30 minutes, handled an 8 percent increase in its responses to pollution incidents -- while being able to cut its spending 3 percent a year.


While the concept of creating performance-based organizations is simple and compelling, it requires major changes in the way government traditionally does its business. Making these changes have required taking steps in unchartered territory and to date, these have been difficult for the initial set of candidates. This guide is based on the lessons learned from their experience.

What Are the Prerequisites for Becoming a PBO Candidate?

As noted earlier, not all functions make appropriate candidates for conversion to a PBO. The following prerequisites seem to be appropriate in making that determination:

What is the Process for Creating a PBO?

The members of the President's Management Council are responsible for identifying potential candidates for PBOs. Once selected, Conversion Teams are formed with representatives from the candidate function, the parent department, OMB and NPR.

Role of the Conversion Teams

Role of Office of Management and Budget and the National Performance Review

What Pieces Need to Be in Place to Be a PBO?

Several documents or activities are associated with being a PBO. Some of these are becoming standard for all agencies -- such as strategic planning and performance measurement as required under GPRA -- but others are unique to PBOs:

Planning and Goals

Chief Operating Officer

Flexibility and Accountability

(1) specifies the organization's boundaries (e.g., policy/administrative split),

(2) outlines cooperative relationships with other agencies (e.g., creating cross-servicing to

provide or purchase services from other agencies),

(3) outlines the administrative flexibilities granted (e.g., departmental and central

management agencies) and

(4) outlines the legislative flexibilities sought/granted.

The Transition Process

The transition to a PBO will vary by agency. For those where policymaking and operating functions are currently commingled, the current political head might also carry the COO title until he or she leaves office. At that point, the two roles will be split and the appointment of a policy official would be done separate from the recruitment of the first COO. The determination of who prepares the framework document, who writes the initial performance agreement and the recruiting strategy will need to be developed, along with the timing of each. The design of the transition will need to be negotiated with the conversion team and the affected department.

What Needs to be Developed After the PBO is Established?

In addition to the items that need to be put in place to create a PBO, once the organization is established, a series of accountability reports will need to be generated. These are existing reporting requirements in most cases, such as those prepared under the CFO Act and for GPRA.


Following the Vice President's announcement of the PBO proposal in March 1996, the initial eight candidates made a great deal of progress. However, since this type of administrative restructuring had never been attempted before, much was learned and this has been factored into the current effort. Following are some observations these initial candidates made as to what worked or did not work in the original process:

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