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Government contracting has existed in America in some respects since the inception of the republic, according to Dr. John O'Looney of the Human Services and Civil Education Division at the University of Georgia. But a dramatic increase in outsourcing began in the 1960s and 1970s partly because the government itself was not equipped to expand at the necessary rate to meet the demands for new services.

"There was also a belief that contractors could be more flexible and efficient than government agencies, especially for short-term projects that characterized the new categorical or grant funding mechanisms that began to be heavily used at this time," O'Looney says. "And politically speaking, outsourcing has grown whenever political actors needed to show that they had downsized government without actually making substantial cuts in public services."

Today, the governments' rationale for outsourcing, whether state or local, depends on the circumstances, O'Looney notes. For instance, it is likely that new services are outsourced because when the service was established there was already a well-financed, well-organized, and politically connected group of providers in the private sector who had the capacity to provide the service. In these cases it becomes easier and often cheaper to outsource a service rather than to build the capacity in-house. In cases where an existing governmental service is outsourced, O'Looney continues, the same set of circumstances probably apply. But in addition, governmental managers become influenced by the successes of other public managers. If a number of cities have been successful with an outsourcing initiative, other cities are likely to follow.

"Sometimes services are outsourced because a manger or policy maker simply believes that the private sector does a better job," he says. "The government may feel that it doesn't have personnel that is qualified to do this job. This is often the case with respect to human services and technology-related services. But it should be recognized that the evidence on privatization being superior to public sector delivery is far from conclusive."

Functions That Are Outsourced

In general, he says, the most frequently outsourced services are those that government managers see as peripheral to the mission. Like most organizations, the government is less likely to outsource functions that are core competencies.

"It is a way for government policy makers and managers to concentrate on their primary responsibility, which is steering the government in the right direction, not rowing it," he says. "By outsourcing the 'rowing,' the focus becomes clearer."

Since the 1960s the number of services being outsourced has grown significantly. Vehicle towing is the number one function that is outsourced by major U.S. Cities, O'Looney says. Eighty percent of major U.S. cities say they outsource this process followed by: solid waste collection at 50 percent, building security at 49 percent, street repair at 40 percent, ambulance services at 36 percent, printing services at 35 percent, street lighting/signals at 26 percent, drug/alcohol treatment centers at 24 percent, employment and training at 24 percent; and legal services at 24 percent.

Awarding the Contract

Most governments have developed different types of contract award processes for each specific service that is outsourced. For services that can be described in terms of design specifications, governments will mandate acceptance of the low-bid proposal. For complex services, governments will typically put in place a proposal evaluation process with specific points. In these cases, contracts are awarded based on a number of key criteria, including the contractor's organizational and staff qualifications.

"This process brings human judgement into play. And human judgement is sometimes fallible or subject to bias," he says. "As a consequence, when selection of a contractor generates strong feelings of disappointment among potential contractors who do not receive the award, governments that have not put in place mechanisms that insure fairness and objectivity can lose some of their legitimacy in the eyes of the public."

It isn't enough to simply put in place a fair contract awards process. Public managers need to attend closely to the relationship, understand and use good judgement with respect to the ethical parameters of the relationship, and develop and use good negotiation skills throughout the entire contract period, O'Looney says. In addition, with the increasing emphasis on performance-based contracting, contract managers need to understand both the power and limitations of evaluation methods and technologies within each of the respective service areas.

But public managers have been trained to administer services and aren't often equipped to be good contract managers, he says. And putting in place processes that are airtight in terms of their objectivity and fairness can add considerably to the overhead costs of contract management.

Being Held Hostage

This lack of knowledge on complex issues and contract management can potentially lead to the vendor holding the government body captive and potential savings become only an illusion. "Many governments have experienced a situation where in the first year, the contractor low-balled the price of the contract, only to raise the price substantially in subsequent years," he says.

This vulnerability is particularly evident in the following cases:

• When re-entry costs are high. For example, after giving up sanitation services, it may be costly to purchase the fleet of vehicles necessary to get back into delivering this service.
• When the government doesn't understand what it's receiving for its payments. This situation often occurs when a government outsources technology services that it has a hard time understanding.
• When the contractor gains control over a vital resource or technology. For example, if a government purchases a proprietary database from a vendor for tracking property records and then discovers that that the cost of this data base is too high. The contractor may ask for a high premium to reformat the data for use in another system.

Contract management will become even more complex as researchers in the outsourcing field identify new factors such as "cycles of privatization" and new forms of contracting, like the complete design, building, and operation of a facility and work process rather than for the separate pieces of work, O'Looney says.

"Contract management will probably become more of an art than a science," he says.

Dr. John O'Looney has over 20 years experience in assisting government and non-profit organizations to improve their management, enhance their performance, and evaluate their impacts. O'Looney is currently, a Public Service Associate at the Carl Vinson Institute of Government at the University of Georgia. He is the author of over 20 journal articles and six books that include Outsourcing State and Local Government Services, Redesigning the Work of Human Services, Geographic Information Systems and Local Government Decision Making, Local Government Planning for an Internet Future, Economic Development and Environmental Control, and So You Want Emergency 911 Services: A Handbook.

Publish Date: August 1999

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Copyright © 1999 - Everest Partners, L.P.

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