The idea that government should not be in the business of business was first articulated by the Bureau of the Budget during the Eisenhower administration in the 1950s. BOB was the predecessor to the Office of Management and Budget, which was created in 1970 during the Nixon administration.

Government should not be in the business of business. What this principle means is that there are broad areas of business activity that should lie outside the domain of government effort, e.g., providing food service, manufacturing, advertising, and offering medical services.

When Ronald Reagan took office in 1981, one of his top priorities was to shrink government. He believed that many of the activities carried out by civil servants could best be executed by the private sector. So he instructed the Office of Federal Procurement Policy (OFPP) to aggressively implement OMB Circular A-76, a government directive geared toward privatizing government activities.

Throughout the Reagan administration, A-76 was applied energetically to get government out of the business of business. This entailed contracting out many services that previously were carried out by government. A lot of A-76 initiatives made good sense. It was obvious that food service, motor pools, and photocopying should be carried out by the private sector.

As a general rule, it makes sense to outsource low-end services. Things get trickier when we look at higher end services. In its fervor to outsource work, OFPP began targeting data processing and engineering services. Certainly, the private sector has great capabilities in data processing and engineering. However, OFPP did not take into account that by outsourcing high-end services, it was contributing to the technology “hollowing” of the federal workforce.

This has indeed transpired. To a large extent, over the past 25 years government has lost its technology competency through outsourcing. Why is this a problem? Because it means that government now has trouble defining technological requirements for new systems. It may not even have the competence to engage in effective outsourcing, since it lacks the capability to write technically-based requests for proposals or to evaluate technical proposals. Once contracts are underway, it may lack the capacity to monitor technical work efforts.

Because of the difficulty government agencies encounter when overseeing large, complex, technology-based programs, some agencies have recently moved to pursue a Lead Systems Integrator (LSI) approach to program management. With LSI, government hands over all program management responsibility to the LSI prime contractor. Thus government stands on the sidelines as contractors take over the whole program management effort.

Not surprisingly, the LSI approach has not worked well. The Coast Guard turned over all program management responsibilities for its $24 billion Deepwater program to two contractors as part of an LSI arrangement. Deepwater’s goal is to refresh aging ships and aircraft. Deepwater should now be called Deep Trouble, since is has led to the building of cutters that are not seaworthy.

The Coast Guard has been criticized for not being actively involved in the management of this LSI-managed program. The interests of the government buyer do not correspond entirely to the interests of the contractor, so we should not be surprised when troubles arise.

The LSI approach arose because of the government’s loss of its technology capabilities. If an agency lacks the personnel to oversee programs, then it seems to make sense to contract out the whole program management effort. The loss of these capabilities can be tied to twenty-five years of aggressive outsourcing of government work efforts.

Government faces a major challenge now: to reestablish threshold technological capabilities that enable it to function effectively. From a public policy perspective, A-76 needs to be reexamined. Knowing what we know after a quarter century of aggressive outsourcing, what does it mean when we say that government should not be in the business of business? In 1981, the answer seemed straightforward. In hindsight, we see that our early response was naïve.

Of course, the real challenge is to get Congress and the president to have the foresight and courage to recognize that the interests of the public and the interests of contractors are aligned imperfectly. The public needs to tolerate government’s occasional incursions into the business of business, particularly if this enables government to maintain an ability to establish the technology competence it needs to serve the people.