From the March/April edition of the Employee Ownership Report, a publication of the National Center for Employee Ownership. Reprinted with permission from the NCEO.
For more than a decade, there have been discussions about privatizing federal entities. Most often this is done by contracting out services to private companies. Since the mid-1980's, there has been active consideration of turning operations over to employees instead. Until last year, however, no employee-owned business had been created this way. In 1996, 650 employees of the Office of Personnel Management's Office of Federal Investigations (OFI) became owners of a new private company, US Investigations services (USIS). The privatization is expected to save the federal government more than $20 million in the next five years without, as is often the case, forcing layoffs or substantial reductions in pay and benefits.
The OFI provided background investigations to more than 4,800 government offices in more than 100 federal agencies. It housed 250 people, together with their computer systems, in its main office in rural Pennsylvania. An additional 450 field agents conducted on-site background investigations from six regional offices and 125 individual locations. The OFI charged about $90 million annually to the various government agencies that used its services.
As part of the current administration's "Reinventing Government" initiatives, designed to reduce and control costs, the Office of Personnel Management (OPM) decided in early 1995 to either close OFI and contract with the private sector for all required background investigation services, or as an alternative, to spin off the entire entity through an ESOP privatization. Contracting out to the private sector would have meant the loss of up to 700 jobs, the economic devastation of the small rural town of Boyers, Pennsylvania, and the potential disruption of security services to the federal government.
OPM decided instead to consider an employee buyout. After receiving results from a positive feasibility study, OPM contracted with a team of ESOP experts to organize the transaction. Although some political issues were raised about the proposal in Congress, in the end, the Chairman of the House Government Operations Committee gave his tentative blessing to the concept of ESOP privatization.
The privatization team worked with OPM and the employees of OFI for thirteen months, leading to the creation of the new employee-owned company, which began operations on July 7, 1996 as US Investigative Services. As part of the process, USIS hired a senior management tam with appropriate management skills, including a new CEO, several vice presidents, and a CFO (Larry Sievers, who had previously been CFO of a very successful ESOP firm). A plan was created to expand into new private background investigations markets as well as state and local government markets.
USIS started life with a three-year, sole-source contract with OPM, providing for a series of price decreases over its three-year term. Improved productivity and diversification of the customer base are intended to offset this lower pricing.
The employees of OFI were kept informed throughout this process through a series of meetings, Internet bulletin boards, and newsletters, but doubts and concerns persisted. Many, if not most, employees were quite content to work for the government and worried that a private company would not offer comparable pay and benefits. The final compensation package, however, provided for no reduction in salaries and wages and only a slight reduction of non-ESOP benefits. In addition, the ESOP was projected to provide very substantial benefits upon retirement. All in all, the employees were surprised and pleased by the results. When USIS offered employment to all OFI employees, more than 90% chose to accept employment with the ESOP company. All employees participate in the ESOP, which owns 90% of the stock of the company; certain senior managers purchased the remaining 10%.
The new leadership of the company is well aware of the need to get employees involved at all levels. To that end, two employees are elected as members of the board of directors. Two other employees have been appointed by the board. The Administrative Committee is composed of two elected members and two appointed members. The self-directed team approach to management at the Operations Center in Pennsylvania has continued and been expanded. Employees have been involved in developing corporate policies, including those in human resources. The CEO regularly tours work locations and meets with employees to solicit their input on pending issues. The ESOP Administrative Committee periodically publishes a bulletin to help educate employees on ESOPs. The corporate administrative offices have held meetings with employees at the Pennsylvania location to introduce their staffs and explain the services they provide. Employees provided feedback on how the services could be improved. Finally, USIS is preparing to implement an ongoing "Voice of the Shareholders" process to solicit input from participants on company operations and management.
Since the privatization, USIS has done extremely well, already hiring 70 new workers and exceeding sales projections. So far, the process seems to be a good argument for privatization through employee ownership.
This article is an edited version of a longer article on this subject by Malon Wilkus of American Capital Strategies, an ESOP investment banking firm that led the USIS project, with additional input from Joe LoBuc at USIS. The full article appears in Mr. Wilkus' periodic column for the NCEO Web site.
