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I’ve been wanting to do a longer post on 18F ever since the General Services Administration released its Inspector General’s report on the Office about a month ago. But I’ve been a bit, uh, distracted by some recent U.S. political news and haven’t had the time. However it’s been a month since the IG’s report came out and I figured I need to get some quick thoughts down, especially as 18F faces an uncertain future.

The 18F IG report was ugly. Chief among the criticisms was that 18F is hemorrhaging money, with $31 million in 2014-2015 losses with another $10m on the way for 2016. In response folks like GSA Administrator Denise Turner Roth and the new head of the Technology Transformation Service Rob Cook have emphasized the importance of ensuring cost recovery and making sure that 18F breaks even.

My message to them: please don’t.

18F has done a remarkable job of injecting technical talent into the federal IT community. They’ve built a senior team (at least, capability wise, if not necessarily in years) of truly elite folks. And they’ve done an inspirational job of evangelizing the digital promised land for a moribund federal IT community.

But as a reigning dark wizard of the federal contracting community, I’ll let everyone in on a dirty secret. When operating at scale, which 18F is unquestionably doing, federal services companies, which 18F is trying to be, do not make money on senior-level personnel, whom 18F has focused on hiring. We make sales based on hyping the experience and capabilities of our best people. But we don’t make money on those folks, due to the unique economic physics of the services industry which are a bit too complicated to dive into in this short post.

In short, senior level folks are essentially loss leaders.

Instead federal services contractors make money by providing as many junior to mid-level folks as possible underneath our senior-level umbrella. This is especially true in the current budgetary environment, with sequestration putting intense downward pressure on rates. While some small, niche shops can get away with top heavy structures, companies operating at scale—even elite organizations like the Big Four—count on large, long-term staff-augmentation-type contracts loaded with junior and mid-level billets to keep them in the black.

So by prioritizing cost recovery, 18F risks evolving into the type of organization they railed against in their founding: a bloated, sluggish, federal IT services body shop.

Instead, particularly as we face an uncertain political transition, it’s imperative that we come up with different techniques for valuing 18F’s contribution to federal performance. Perhaps by crediting them cost savings achieved by the agencies they support? Or maybe they can be a loss leader for GSA’s other administration or procurement services (e.g. contracting help and preferred vehicle access / discounts for O&M of 18F developed applications)?

I don’t know. But there’s got to be a better way than force-fitting 18F into an IT body shop model.

Thoughts from the PSF Community?

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