The Daily Caller

The Daily Caller

Government ‘insourcing’ is financially and ethically wrong

Photo of Gary Shapiro
Gary Shapiro
President and CEO, Consumer Electronics Association

A recent survey of more than 100 companies found that 60 percent of them had lost employees to what’s known as government “insourcing.” According to the study, this was a 13 percent increase from the previous year. But what exactly is government “insourcing”?

Imagine you have a business with a federal government contract. You recruit, hire and rigorously train skilled employees who are cleared for government work. You supervise their performance, resolve all issues and provide benefits, including health insurance and a 401(k) plan. You invest in their continued training and development.

Your employees come through for you, and your company meets every contractual requirement. You don’t get paid more for superior performance, but the contract is renewed each year.

Then the federal government decides to do things differently. Perhaps the government thinks it will save money. In any case, the word on the street is that the White House has demanded that contracts be “insourced” — put another way, that government employees, not private contractors, will conduct the needed work. It also means that you no longer have your government contract, which means layoffs.

You have to tell the affected employees that the government contract is being terminated and the employees will lose their jobs. But, lo and behold, the government is hiring! Your former workers, now unemployed, can apply to do the same work and have the security of a federal government job with the certainty of a large fixed retirement pension. Even if your employees don’t want Uncle Sam as their boss, how can they refuse the work?

So as private business shrinks — or collapses entirely — the federal government gets bigger.

As the survey mentioned above showed, this situation is being repeated throughout the Washington area. In early April, one large government agency informed three private contractors that it was ending their contracts even as it was recruiting their employees.

Only the government can do this. In the private sector, such behavior is barred by standard boilerplate in most commercial consulting contracts. Not to mention that any company that went about hiring this way would be viewed by the entire industry as unethical.

The same legal and ethical standards should hold true for the government. The usual explanation the government uses when it begins insourcing employees from private firms is that it’s a way to reduce spending. But this is a fallacy, because the numbers only account for the cost of the contract versus the salaries of hiring federal employees.

Fully allocated costs of employees include out-of-pocket salary and benefits as well as the present value of long-term pension obligations. We also have to consider the cost of office space, equipment, software licenses, travel and training. The Center for Strategic and International Studies (CSIS) — a highly regarded, independent think tank — has, in fact, done the most in-depth analysis of the government’s cost comparison tools for insourcing/outsourcing decisions. The CSIS report highlights the inadequacy of the government’s cost analysis and concludes that the new workforce system now being used at the Department of Defense, which sought to cut costs by insourcing, is actually more expensive than the one it replaced.