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November 18, 1996

Federal Privatization and Outsourcing of information Technology Functions: A Practitioner's Perspective

FEDERAL CONTRACTS REPORT, Vol. 66, No. 19

Privatization is a key toward efforts to shrink government costs yet still maintain services, especially for information technology functions. Government can privatize in two ways; it can convert an existing government organization into a private firm, or it can completely outsource non-core government operations. In 1983, the government issued OMB Circular A-76 (hereinafter "A-76") declaring its support for privatization and providing guidelines for when government functions should be turned over to private firms.

Despite political pressure to privatize and A-76, there are serious impediments to privatization. Some are contained in A-76, which creates an "uneven playing field" giving preference to government entities. Government agencies can submit bids that contemplate best case scenarios, because unexpected losses will simply be absorbed by the government. Private companies, on the other hand, must protect themselves from unanticipated risk by building a contingent sum into any bid. The process proscribed for privatization under A-76 is also slow and cumbersome, discouraging agencies from attempting to privatize. Besides these structural problems, other barriers to privatization include: 1) labor resistance; 2) funding concerns; 3) congressional unwillingness; and 4) public policy concerns.

Many of the traditional obstacles to privatization were eliminated with the passage of the Information Technology Management Reform Act of 1996. This legislation requires agency heads, when assessing information technology, essentially to determine: 1) if the job must be done at all; 2) whether the government should be responsible for the activity; and 3) if the government itself must actually perform the activity. This pro-privatization legislation builds upon past government successes in privatizing non-core functions. Numerous possibilities exist for further privatization of government functions. Bills were introduced in the 104th Congress that would have required @all goods and services procured be from private sources. While this legislation was not enacted, similar legislation will be introduced in the 105th Congress. In sum, the savings from privatization and the its recent successes indicate that the government will continue to relinquish direct control over many activities better left to the private sector.

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