John A. Koskinen - July 8, 1997
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JULY 8, 1997

Mr. Chairman, I am pleased to appear before the Committee this morning to discuss the Administration's initiative to create Performance-Based Organizations, also known as PBOs. We believe these organizations can play a significant role in improving government effectiveness and increasing public confidence in government operations.

This Committee has been a leader in providing Federal managers with the tools and incentives to perform effectively and accountably. In the past few years this has led to the adoption of the Chief Financial Officers (CFOs) Act, the Government Performance and Results Act (GPRA), the Clinger-Cohen information technology reforms, and the Debt Collection Improvement Act.

PBOs grew out of a concern that we share with this Committee for management improvement. Under Phase II of the National Performance Review, we set up teams to study every function and activity of government to decide which ones the Federal Government should continue to perform, which it should eliminate together, and which it should shift to other levels of government. During that effort it became clear that many agencies perform businesslike functions that carry out important public purposes. While not suitable for privatization, these functions have the potential to be managed much more effectively.

In March 1996, Vice President Al Gore announced that a series of agencies would be transformed into performance-based customer-oriented agencies. President Clinton described the initial candidates in his FY 1997 budget, an initiative carried forward into the President's FY 1998 Budget.

What is a Performance-Based Organization?

A PBO is a discrete management unit that deals with the public and has operations that can provide clear measures of performance. Primary responsibility for policy making is separated from program operations and remains in the domain of the Department under the control of political appointees. Program operations are retained in the PBO. While this division of responsibilities will be clear, the managers of the PBO will continue to operate within the structure of the organization's present Department to ensure communication between the policy formulation and operation functions. However, by separating policy decisions affecting those operations from daily activities, we can create a management with strong incentives to manage for results by committing to clear objectives, specific measurable goals, customer service standards, and targets for improved performance.

A critical aspect of a PBO is that it would be led by a Chief Operating Officer (COO) hired for a fixed term based on a demonstrated track record of effective management, as distinguished from policy expertise. The COO might come from the private sector or from the ranks of the civil service. The COO will give us a manager with a longer time horizon than the normal political appointee, and, rather than having a focus on career tenure, the COO would sign an annual performance agreement with the Secretary; and his or her compensation and tenure would be tied to the organization's performance. The Secretary may reappoint the COO to subsequent terms, if he or she has met or exceeded organizational and individual performance goals.

In exchange for this increased personal accountability for performance, the PBO would be granted legislative and administrative managerial flexiblities in areas such as personnel, procurement, and other administrative areas. A PBO will otherwise still be subject to all other government wide regulations, rules, policies, and procedures.

Candidates to be PBOs

Not all government agencies or functions are suited to become PBOs. The concept works best with operations that produce clear, measurable results. For example, the foreign policy and planning offices in the State Department or basic scientific research offices at the National Institutes for Health may be inappropriate candidates.

The best candidates to become a PBO are those that:

Some have asked how PBOs differ from government corporations. As you know,

the concept of a government corporation has been applied inconsistently in the past. The corporate form is appropriate when an entity carries out commercial functions that not only produce revenue, but are self-sustaining. However, in the past some entities have sought to become corporations because that was seen as the only way to achieve personnel and procurement flexibilities. The problem is that, to achieve those goals, they were turned into independent, freestanding entities, making effective policy control and oversight much more difficult.

In contrast, a PBO will focus on performance and, importantly, remain within its present department under the policy guidance and direction of the Secretary. It will still be subject to all government wide regulations, rules, policies and procedures, unless specific waivers are granted.

The Process for Converting to a PBO

Shortly after Vice President Gore's announcement of the PBO initiative in early 1996, OMB and NPR crafted a process for converting agencies or functions into PBOs. I asked the President's Management Council for potential candidates and the members nominated nine candidates from among their agencies. OMB and NPR then formed conversion teams for each candidate with representatives from OMB, NPR, the candidate function, and their home Department.

These teams identified potential legislative and managerial flexiblities that would allow them to improve the management of their operations. The most progress was made when the candidates worked jointly as a team with their conversion colleagues, especially with their departments, NPR, and OMB representatives.

Early in the process, we discovered that the leaders of many PBO candidates were unaware of the flexibilities that were already available to them under existing law. This was not surprising since implementation and execution of statutory changes is just as challenging and often takes longer than getting the laws passed. We therefore worked with the candidates to ensure they understood and were using the flexiblities Congress and the Administration had already given them.

Thanks to the long, hard work of executives in the candidate agencies, the National Performance Review, and OMB, we are ready to take the next step: seeking legislative action. You will shortly hear from a panel of the first three PBO candidates that have submitted their legislative proposals. While we have consulted with various Congressional offices in the past few months about PBOs generally, we are pleased to enter into a dialogue with you now about these three specific PBO candidates and to seek your support.

Lessons Learned and Progress to Date

In your letter of invitation, you asked that I summarize the progress we've made in the past year and the lessons we've learned that will help future candidates in the conversion process.

One of the things we learned over the course of the past year was the importance of developing commitments for improved performance along with requests for increased operating flexibilities. While it is probably impossible to show a one-to-one correlation between a specific flexibility and a specific increase in performance, we think it is imperative for candidates to commit to increases in performance in exchange for obtaining desired flexibilities.

We also learned that a targeted approach is important. Candidates that requested a wide range of management flexiblities, some of which were minor or marginal to their operations, became bogged down in laborious interagency debates and clearances. Also, successful candidates found it useful to separate those flexiblities that could be achieved administratively from those that required legislative action.

To date, three of the Administration's nine PBO candidates conveyed their legislative packages to Congress in April or May -- the Patent and Trademark Office, the Defense Commissary Agency, and the St. Lawrence Seaway Development Corporation. Three others are developing their legislative packages and should have them completed in the coming weeks -- the U.S. Mint, the Government National Mortgage Association, and the Seafood Inspection Service. Two others are delayed in developing their legislative packages for unrelated reasons -- the Federal Housing Administration and the National Technical Information Service. The Federal Retirement and Insurance Service in the Office of Personnel Management believes it can achieve all the authority and flexibilities it needs administratively, without additional legislation.

We have now asked the President's Management Council to identify additional candidates to begin the conversion process so the Administration can introduce additional candidates next Spring along with the President's FY 1999 budget proposal.


The challenge in creating new forms of organization is to balance the desire for autonomy and flexibility with the need for accountability and oversight. PBOs provide an operational structure that allows Federal entities to carry out their functions in the most effective and efficient manner, yet remain accountable to senior administration policy makers. While the process for converting agencies and functions to a PBO has taken time and effort, we believe the concept is sound and the progress to date has laid the groundwork for success.

As President Clinton said late last year, "We want hundreds of organizations to become performance-based, to be trailblazers in increasing productivity and making their customers happy."

Mr. Chairman, I appreciate your subcommittee's interest in this initiative and would be pleased to take any questions you might have.

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