Best Value and Protectionism

(MoneyWatch)  In many ways contracting at the Federal and State levels in the United States can be contradictory and a little schizophrenic. There are rules and regulations that require for most contracts demanding fair and open competition and the best value for the government. At the same time there are rules on whether only Americans can do the work and where materials come from.

Computerworld has an excellent look at how some states are managing their IT costs through the use of outsourcing. Obviously most people in the U.S. are used to this concept. You call for customer support and you are talking to a person in India or the Philippines. There is a simple reason for this as labor in those country is so much cheaper and that is driving companies to use them.

Government though is faced with trying to preserve jobs in the United States or in their state while also trying to deliver the most services for the cheapest price. There is no question that using outsourcing, and the article considers H-1B visa hiring as outsourcing, will lower contract prices. Most IT contracts are labor cost driven. Yet is it fair for a government contract to favor a company even a U.S. one that hires people in other countries.

Some states, like New Jersey, have moved to restrict the use of outsourcing in their contracts. Others as Virginia have allowed it but in their massive IT privatization contract required the majority of jobs to stay instate. This was a special case though as they were converting existing state jobs to private ones. The main point of the article is that as revenue problems persist then there will be more priority on cheaper contracts. This will eventually lead to a larger amount of outsourcing. Although BNET Tech blogger Erik Sherman has a post about IT wages staying stagnant in the U.S. due to the economic problems facing the world. This allows an opportunity for governments to hire contractors and state workers at lower costs.

As I have written many times in the past the major cost of government is personnel. Outsourcing is a way to decrease these costs but by cutting jobs in the United States. The Federal government especially defense has it easier. For the majority of their contracts there are requirements for buying of U.S. materials and the security clearance requirements drive you to use U.S. citizens. Much of the work is done at a U.S. military facility in the United States. There have certainly been a great deal of use of cheaper, foriegn labor in support contracts overseas like in Iraq and Afghanistan but these are due to the wartime unique locations.

Even as the economy improves and tax revenue rebounds this may not lead to a move away from outsourcing. Most contracts are five or more years and often the incumbent may win future re-competes. This means that the state may be locked in for several years to this contract and outsourcing.

There is no easy fix to this as long as cost and best value are determinants of contract awards. Cheaper labor will drive even governments to use outsourcing and off shoring to provide the best service for the lowest price to their residents. The only way to stop this process is to pass laws and regulations requiring use of U.S. companies and locations with an acceptance of the price increase this will require.