What Will Kill Insourcing?

The GAO released a report yesterday updating long-term fiscal projections, and, based on “historical trends and policy preferences,” the US will reach its highest-ever public debt-to-GDP ratio within ten years.

“Our long-term simulations show that absent policy changes the federal government faces an unsustainable growth in debt.”
-GAO Report Dated March 3rd, 2010

This latest data shows debt reaching historical levels much sooner than GAO simulations showed in 2008:  “Under our Alternative simulation, debt held by the public as a share of GDP could exceed the historical high reached in the aftermath of World War II by 2020 — 10 years sooner than our simulation showed just 2 years ago.”

The GAO writes, “In fiscal year 2009 the overall federal deficit reached 9.9 percent of GDP—the largest since 1945, and the deficit is expected to decline only slightly in 2010. While deficits are projected to decrease further as federal support for states and the financial sector wind down and the economy recovers, the increased debt and related interest costs will remain.”

The GAO report singles out the growth in entitlement spending as the single greatest contributor to public debt.  Detailed on the chart below, Social Security will start running a cash deficit this year, the first step on the road to insolvency.   Medicare Hospital Insurance (Medicare HI), in the red since 2008, will be completely bankrupt in seven years.

This means that the push for in-sourcing in government is speeding towards a fiscal brick wall.

Jacques Gansler
Jacques Gansler

Contracts are won by the lowest bidder, and outsourcing is cheaper, as Jacques Gansler told ExecutiveBiz in January, “The government is not cheaper; the Congressional Research Center said so. So have other studies. By contrast, whenever we’ve had competitive sourcing, we get more than a 30 percent cost savings, on average, with higher performance, no matter who wins — and the government most often wins.”

Mr. Gansler also weighed in on fixed-price contracts as a cost-cutting measure, “ I could go down a long list of programs where they tried to use fixed price on development programs. They show, overwhelmingly, that the cost tends to rise during that program.”

stan soloway
Stan Soloway

Stan Soloway of the Professional Services Council echoed these sentiments when we interviewed him last year, “Assumptions are being made based upon fuzzy math that, for budgeting purposes, presumes you can save 30 percent for every position you insource.  The problem is that what you save on contracting costs for support services at ‘Air Force Base A’ may well only focus on immediate personnel costs and doesn’t speak to the total infrastructure and life cycle costs associated with performing the work in-house.”

Jim Gilmore
Former Virginia Governor Jim Gilmore

When we spoke to former Virginia Governor and CACI’s newest board member Jim Gilmore last month, he had this to say about government contracting: “I think that was long as you are offering a good business approach that is good for the business community and at the same time offers effective protections and services to the taxpayer, I think…programs will stand on their own feet.”

Basically, if contractors provide a solid ROI for their services in the form of budget savings, federal deficits could paradoxically mean more contracting dollars as the government scrambles to get “back in black.”

Mark Testoni, President of SAP Public Services, told us last month that red ink in government budgets presents both challenges and opportunities for government contractors.  “In the state and local environment, the impact of recession is really hitting home this year and next. The state budget deficit anticipation for fiscal 2010 is about $100 billion, and it’s about $140 billion in 2011.” He said, “I was in Mississippi just recently and they’re really grappling with how to get to provide citizen services faced with their budget situation.  Most of the other states are in the same position.  Our challenge is to provide a difference in our solutions quickly.  In the past, it might be perfectly acceptable to a state officer to invest in a project whose

Mark Testoni of SAP Public Services
Mark Testoni of SAP Public Services

return on investment was 10 years.  Today it’s more like 10 months.”

In other words, it’s easy to sell to a government running a massive deficit so long as you make a clearly presented, factual case for the cost savings achieved through outsourcing.

So while the political climate in Washington may be inhospitable to contractors at the moment, the national political climate is much worse for spendthrift politicians.  According to  a recent Rassmussen Reports poll, almost 80% of Americans believe the federal government doesn’t handle their money well, and 83% of Americans blame rising deficits on politicians’ unwillingness to curtail spending.

All government contracting has to do is point to the numbers, and wait for the contract awards to start rolling in.

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