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Monday, September 30, 2013

Why not take all of me? Here's why...

Mom told me not to put all my eggs in one basket.

Contractor’s U.S. Ties Tough to Break After Vetting Lapse
USIS has won at least $588 million under U.S. government contracts set to expire within a year, according to data compiled by Bloomberg. USIS has at least 40 federal contracts for work related to investigations, 14 of which are scheduled to expire by Oct. 1, 2014, according to federal procurement data compiled by Bloomberg. The company performs background checks and other investigative work for the Federal Bureau of Investigation, U.S. Immigration and Customs Enforcement and the Department of Agriculture, among other agencies.

The agreements include a lucrative deal with the U.S. Office of Personnel Management, which is responsible for most federal background checks. While the expiring contracts might provide agencies with opportunities to begin dropping USIS, replacing the government’s top provider of background checks might lead to more chaos in an already overburdened system.

“USIS provides the heart, the limbs and the guts of the operation for the Office of Personnel Management,” said Tiefer, now a law professor at the University of Baltimore.

The number of people with security clearances ballooned to about 5 million last year, and contract investigators have struggled to keep up with the demand for background checks, according to security specialists.

The government increasingly has relied on USIS for that vetting. Dumping a firm like USIS, a unit of Falls Church, Virginia-based Altegrity Inc. that has more than a half-billion dollars in federal contracts running out in a year, could create as many problems as it solves. It might shift a backlog of cases to two other companies, which could lead to more vetting lapses.

Shifting the load to competitors such as Arlington, Virginia-based CACI International Inc. (CACI) or KeyPoint Government Solutions Inc. -- a unit of Veritas Capital, a New York-based private-equity firm -- might worsen the situation, Tiefer said.

“There are not a lot of players in this field,” Brian Friel, a Bloomberg Industries analyst, said. “The government doesn’t have a lot of options.”

USIS’s prominence as a background-check contractor is due to its origin as the Federal Investigations Division of Office of Personnel Management. The unit, originally known as U.S. Investigations Services Inc., was privatized in 1996 as part of then-Vice President Al Gore’s effort to “reinvent” government by reducing the size of the civil service, according to a 2011 report by the Congressional Research Service.

Contracting out security reviews was designed to save the government money and offer new work for about 700 investigators no longer needed because of a declining clearance workload as the Cold War ended. Instead, demand for security clearances surged after the Sept. 11, 2001, terrorist attacks.

USIS was given a non-competitive, three-year contract for investigative work with the personnel office and granted free access to federal computer databases that weren’t available to other firms.

Since 2006, at least 20 investigators have pleaded guilty or have been convicted of falsifying background-check reports for the personnel office, according to the agency’s office of the inspector general.

Ten of those were contractors. Eight of them worked for USIS.
Surely there must be some way to generate more competition with the industry behemoths? Not all of America's innovation is limited to the IT industry, is it? There is a cost to contracting with too-big-to-flail, and it includes creating complacency as well as dependency.  And  myopia.

Noting that USIS was at one time a government agency, I am reminded of the many instances mentioned in James Nagle's A History of Government Contracting which illustrates the many times when American government has instigated industrial innovation, including the industrial revolution. He reminds us that "good enough for government work" was not originally the pejorative it now is, but indicated the gold standard of workmanship.

For another exposition of that proposition, see 'The Entrepreneurial State': Apple Didn't Build Your iPhone; Your Taxes Did, by Mariana Mazzucato, with some excerpts as follows.  
Throughout history, strategic government expenditures have played a key role in spurring economic growth. private finance is too risk-averse -- afraid -- to engage with industries characterized by high technological and market risk. The fear explains why we have seen venture capital entering, in industry after industry, only decades after the initial high risk has been absorbed by government.

Mission-oriented public investment put men on the moon, and later, lead to the invention and commercialization of the Internet, which in turn has stimulated growth in many sectors of the economy. Indeed, as I describe in the longest chapter of my book, the U.S. government has been a leading player in funding not only the Internet but all the other technologies -- GPS, touchscreen display, and the new Siri voice-activated personal assistant -- that make the iPhone, for example, a miracle of American technology.

Casting the public sector as the villain and business as savior has relieved the private sector from any obligation to increase its own commitment to the innovation process. There simply are not enough large businesses today playing the role that Xerox PARC (the Palo Alto Research Center) and AT&T (Bell Labs) played in the past.

Today's big companies, like Cisco and Pfizer, spend almost as much on share-repurchase schemes (which enrich those who own stock) as they spend on research. Interestingly, the big "repurchasers" (the biggest being in oil and pharma) often justify such buybacks with the claim that there are no other "opportunities" for their investments. But really? No opportunities in health for pharma these days? Nothing for oil companies to invest in? What about safe and clean renewable energy?

When building innovation "eco-systems," then, it is important to make sure the role of business is symbiotic, not parasitic. That means, if we want to rebalance the economy, we need to rebalance the story we tell about who the innovators really are. Interestingly, it was the venture capital lobby in the mid-1970s that pushed for the capital gains tax to fall by 50 percent (from 40 percent in 1976 to 20 percent in the mid '80s). It has been falling ever since, based on the narrative that only thus will the entrepreneurial "risk-takers' do their thing and enrich us all.

But that narrative is false. The entrepreneurial state has funded the radical innovation behind much if not most of modern economic growth. Denying government today the resources to do its thing endangers us all.

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