Five Ways Pentagon Insourcing Will Backfire

On April 8, two days after defense secretary Robert Gates proposed huge cuts to military investment programs, the Pentagon’s comptroller signaled where all the money saved will end up going. It will go to paying for more bureaucrats — 33,000 to be exact, many of whom will paradoxically be added to the acquisition workforce at the same time dozens of weapons programs are being killed or scaled back. The same directive expanding the ranks of civil servants also cut the funding available for hiring private contractors. Guidance issued by the department for implementing the shift asked military services and agencies to “review all contracted services for possible insourcing,” stating that “insourcing is a high priority of the Secretary of Defense.”

So the Pentagon’s outsourcing surge — a movement spawned in equal measures by Republican free-market ideology and the demands of the Global War on Terror — is over. Part of the rebalancing that Secretary Gates is pursuing will entail moving many administrative and support jobs out of the private sector and into the public sector, in a process now widely called “insourcing.” This movement too is being driven in part by ideology, and also by the widespread distrust of defense contractors. What it is not being driven by is a hard-headed analysis of operational and budgetary consequences. Those will be mainly negative, despite all the claims of savings and productivity gains that proponents have made. Here are five reasons why insourcing will backfire, harming the interests of both taxpayers and warfighters.

1. Bigger budget deficits. Unlike contractors, civil servants are typically hired for life. Once they enter federal service, they remain there until they retire. That means each of the 33,000 new hires entails a commitment of pay and benefits that extends decades into the future, using compensation rates that generally exceed those of the private sector and are growing faster than the rate of inflation. You’d think that policymakers would take that into account at a time when the government has to borrow $4 billion per day, mainly from foreigners, to keep its current pace of operations going. But as is the case with many other matters at the Pentagon, the senior players on the E-Ring don’t seem to grasp how their choices impact the rest of the government.

2. Loss of flexibility. One of the nice things about relying on contractors is that when you don’t need their services anymore, you can easily get rid of them. The Army seems to be pretty happy with the job that companies like KBR have done in Iraq, but it won’t be sentimental when the time comes to say “goodbye” to Iraq and KBR doesn’t have much of a constituency to protect it on Capitol Hill. If the same logistics work were being carried out by civil servants, though, the political system would move heaven and earth to protect their jobs even though the work no longer needed to be done. Thus, no matter what policymakers may say about “temporary” hires, insourcing tends to transform flexible arrangements into fixed obligations — obligations increased by the need to train, sustain and support the additional civil servants.

3. Loss of expertise. The government isn’t very good at sustaining world-class technical expertise for the simple reason that it doesn’t make stuff. Few people in the government will ever understand jet engines the way Pratt & Whitney and General Electric do, and fewer still will understand satellites the way Lockheed Martin and Boeing do. So when the government attempts to assemble an in-house competence for systems engineering or software generation, it seldom comes close to matching the proficiency of market sources. That’s one reason why SETA contracts — system engineering and technical assistance contracts — exist. But if the government is determined to carry out complex technical tasks using organic personnel, and then limits the ability of the real experts to support it through SETA work, the overall competence with which tasks are accomplished will decline considerably.

4. Decreased investment. As noted above, federal pay scales and benefits tend to be better than those of the private sector. Unfortunately, that does not translate into higher productivity. There is virtually no research demonstrating conclusively that government workers can perform tasks more efficiently than their private sector counterparts, but there is abundant evidence that the government’s people costs are rising inexorably. Since the government cannot continue borrowing money at its current pace and increased tax receipts are unlikely to cover the yawning budget deficit, spending will have to be reduced. But given the political barriers to firing federal workers, the government will cut investment in new technology instead. We are already seeing that trend in the Gates proposals to increase both uniformed and civilian personnel in the defense department while cutting modernization. That tradeoff will continue, producing a more labor-intensive defense posture. The simple truth in the current fiscal environment is that if people costs keep going up, they will squeeze technology spending out of the budget.

5. Increased politicization. As old-line industrial unions like the United Auto Workers have declined, they have increasingly been replaced in the Democratic Party’s electoral base by public-sector unions. Organizations like the American Federation of State, County and Municipal Employees exercise a powerful influence over the deliberations of Democrats in Congress and the White House. The growing role of public-sector unions in the Democratic coalition makes the party less willing to oppose organized labor on a host of defense management issues, including how to perform depot maintenance and who should provide logistical support to forward-deployed forces. Even Republicans in Congress are ill-disposed to challenging public-sector employees in their home districts, but in the case of Democrats the nexus between public-sector unions and elections is so strong that it often doesn’t seem to even matter who can perform work more cheaply or efficiently. The current push to insource reflects this political dynamic, and signals it will grow stronger.