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Improving Financial Management

ADOPT GOOD BUSINESS PRACTICES

FM06: "FRANCHISE" INTERNAL SERVICES

BACKGROUND

The federal line manager generally receives numerous administrative services from internal monopolies and is totally dependent on those monopolies for delivery of the services needed for program accomplishment. These monopolies do not have concrete incentives to treat the line manager as the customer, and the line manager has little control over the quality of services received. Exacerbating this situation is a highly conservative, risk-averse federal culture that emphasizes adherence to regulations over service and results.

In recent years there has been considerable growth of cross-servicing within the government. Enterprising service organizations have expanded their services to customers in other organizations on a reimbursable basis. The Cooperative Administrative Support Unit program has been a catalyst for such cross-cutting service support between agencies. Similar efforts have been successful in the Department of Defense through the Joint Inter-Service Regional Support Group program and the Defense Reutilization Marketing Organizations. Centers of innovative entrepreneurship have developed elsewhere in government including the Department of Agriculture's National Finance Center; the Department of the Treasury Financial Management Service's Center for Applied Financial Management; the Interior Department's Administrative Service Centers in Denver and Washington; and the General Services Administration's Federal Computer Acquisition Center for automated data processing buys. The success of these organizations in improving service and reducing costs sets the stage for expansion of this concept throughout government.

The franchising concept draws from most of the principles of the National Performance Review (NPR), including focusing on the needs of the line manager, injecting competition, finding market instead of administrative solutions, decentralizing authority, and fostering excellence. We have chosen the term "franchising" to refer to internal services based on three basic concepts: They are reimbursable, competitive, and conducted within governmentwide principles and criteria.

NPR's motivating vision is for the line manager to receive quality services fast and for the best value. In this concept, service excellence is promoted through competition among administrative units.[Endnote 1]. The line manager controls funding and buys from the best provider. Servicing units grow or shrink based on demand for their services and are free to manage flexibly to meet demand. The financial bottom line guarantees discipline and excellence in the system. Services are driven by the needs of the line manager who is free to purchase these services from the best provider.

This concept is applicable to any services common to more than one organization. These include all administrative functions such as procurement, personnel, payroll, finance, logistics, security, and facility management. They could include other services such as information technology, engineering, quality assurance, and other types of internally focused support. The characteristics of this approach include:

--The "franchised" support unit operates within principles and minimum criteria, which are established governmentwide by central agencies (ie. Office of Personnel Management (OPM) for personnel) to guide administrative and other services. These criteria would be incorporated in the contracts executed between the customer and servicing agencies.

--The market mechanism drives the model. Administrative units actively market their services to gain business. Entrepreneurial management is a key success factor. The line manager seeks the best deal based on price and excellence of outputs--speed, consistency, attitude, and quality of services provided.

--The franchising could occur in a variety of circumstances including: within small or large geographic areas; with a mix of local, state, and federal government; with any combination of services; among existing or new civil service units; and at some point during the implementation process, with competition by private businesses.

NEED FOR CHANGE

Flexibility to manage a unit is critical for success and includes businesslike practices, the ability to manage the workforce easily in response to business changes, freedom from full-time equivalent (FTE) controls, a revolving or industrial-type fund with pricing flexibility, and simplified personnel practices. A number of actions recommended elsewhere will provide considerable additional flexibility for managing in a businesslike manner.

There are numerous barriers in the current system. Financial barriers block reimbursable activities from the flexible use of "profits" and transfer of funds among line items and object classes. Personnel barriers and recommendations are discussed in an accompanying NPR report on human resources management. FTE controls on agency workforce levels are based on agency appropriations from Congress, and the FTE control system must be changed to enable rising and falling workforce levels and budgets in a competitive, reimbursable cross-servicing environment. FTE controls are discussed in an accompanying NPR report on budgeting. Unless the FTE control system is changed, agencies will lack the incentive to use their own ceiling to expand services and the workforce on behalf of outside customer organizations even though the costs are paid by the customers. Parent agencies do not perceive service to other agencies as a part of their mission, and central management agencies have tolerated or only half- heartedly promulgated this as the government's policy. In addition, a lack of internal agency delegation of financial and other authorities to field-level managers creates impediments to cross-servicing arrangements.

Incentives are needed for success. In addition to new flexibilities recommended by NPR, additional incentives are important to success. A means of providing capital loans for initiating new servicing units or upgrading existing capabilities would be desirable. In addition, an important incentive would be flexible use of "profits" including gainsharing with employees and the parent agency.

A minimum supporting management structure would be necessary to provide services to the franchised support units and customer agencies. The model would be an unbureaucratic "central nervous system" serving as an information repository and broker. Services to units would include coordination with franchising agencies and information on start-up, best practices, business advice and opportunities, regulatory issues, etc. Services to agencies would include working to ensure a critical mass of competing providers and information on potential servicing units and services available. This would be a mixture of central national effort to provide promotional, information, and brokering services and reliance on regional and local efforts among significant numbers of participating agencies.

The desired end-state is a government in which internal services are delivered by servicing organizations (meeting previously established criteria) in competition with similar organizations. Their customers are the line organizations responsible for carrying out the government's missions in the least costly and most effective manner. While the details of this need to be tailored to each agency's specific circumstances and requirements, the basic principles of the process are as follows: agencies prepare their internal service providers for conversion to competitive, reimbursable business practices; in graduated phases, funding for these services is redirected from the current service monopolies and provided to the customer organizations; as the customer organizations receive the funds, they are free to purchase services from competing service providers who offer more effective outcomes; the former monopolies succeed or fail based on their ability to provide equally or more effective outcomes than are available elsewhere. This will not be an easy process. The idea of applying market incentives to internal federal services is revolutionary to those who have practiced in the 100-year monopoly tradition. Even with greater flexibilities and new incentives, there will be great resistance and reluctance to try. While agency heads are grappling with long-term plans for making this concept work within their organizations, NPR recommends an interim effort designed to sell and facilitate the overall concept within and across agencies; identify early opportunities for implementing franchising; and provide a central support activity for start-up and long-term implementation.

ACTIONS

1. Implement franchising for service functions at the agency head's discretion. (2)

The President, by executive order, should instruct agency heads to determine which service functions (e.g., procurement, personnel, finance, logistics, engineering, etc.) their agency does well and can be offered to other agencies and which services are weak and should be purchased from other agencies. Agency chief operating officers (COOs) should be assigned responsibility for making the concept work within and across agency lines and across functional service lines using the reinvention laboratory concept, pilots, or other approaches to accomplish this. COOs should develop long-term agency implementation plans. In order to facilitate franchises, OMB should introduce legislation permitting the establishment of franchise revolving funds in all agencies.

2. Establish an implementation team under the President's Management Council (PMC). (2)

As part of their collective responsibilities in the PMC, the chief operating officers should assume overall responsibility for governmentwide implementation of the franchising concept as soon as is practical. The PMC should charter an implementation team to facilitate long-term implementation by the agencies and look for opportunities for immediate action. The Office of Management and Budget's role should be to guide the initial implementation effort and assist the PMC.

ENDNOTE

1. For further discussion, see Pinchot, Gifford, and Elizabeth Pinchot, The End of Bureaucracy and the Rise of the Intelligent Organization (San Francisco, CA: Berrett-Koehler Publishers, 1993), pp. 120-123.

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