Municipal Outsourcing: Do's and Don'ts

Contracting out is not an all-purpose solution, but, done right, it can help deliver better services for less money.

Many local-government officials want to explore outsourcing services, but don't know where to begin. A recent Pioneer Institute paper, "A Practitioner's Guide to Outsourcing: An Opportunity to Improve Cost and Service Quality?", seeks to provide answers and help local-government officials avoid possible pitfalls.

There are a variety of ways for municipalities to outsource services. While private-sector outsourcing is often associated with the manufacture of goods in low-cost nations or moving the provision of services offshore, the outsourcing of public services tends to be more local, focusing on service provision by the private sector; by another local, regional or state government; or by a nonprofit agency.

Done right, outsourcing can help deliver better services for less.

In Springfield, Mass., for example, outsourcing grounds maintenance reduced costs by an estimated 75 percent. Outsourcing reduced the cost of managing and processing workers' compensation claims by well over 80 percent, thanks to improved oversight and control. This and other improvements were the result of applying specialized knowledge to particular services that were otherwise being provided by a municipality in the same manner they had been for many years.

While savings and service-quality improvements may be immediate, outsourcing can also permit municipalities to shift liability to contractors. If a municipal employee is pruning a tree and a limb falls on a car, the municipality will typically be liable for damages. If a private party provides this service, however, the municipality can likely shift this cost to the contractor's insurance.

Perhaps most important, outsourcing allows managers to shift their focus from the inputs--hiring and managing employees, buying and maintaining equipment--to measuring, managing and reporting on results.

While outsourcing has a number of potential benefits, there are also challenges. Services that are difficult to define and whose outcomes are difficult to quantify may not be appropriate candidates for outsourcing. Seeking private competition for these services could potentially be unproductive or result in higher costs if the work is not properly defined or if outcomes are not measured appropriately. Successful outsourcing also requires that local officials produce well drafted procurement and contract documents that concentrate risk on discrete events rather than spreading it across the hundreds of decisions needed to provide a service internally. It also requires strong contract-management skills that not all local governments have.

The most difficult challenge to outsourcing is often political. This risk manifests itself in obvious ways, such as opposition from public employees who would lose their jobs, to the less obvious ones, such as the likelihood that officials will be held responsible for any problems resulting from an outsourcing but not reap the corresponding benefits for success. It may be appropriate to address these concerns by conducting an outsourcing process that includes a decision point after bids are received so next steps can be based on facts about cost and service quality that the bids provide.

Key to successful outsourcing is the delineation of a clear scope of work, development of appropriate performance standards, establishing a pre-outsourcing service baseline, use of valid performance-evaluation techniques, and ongoing communication with the chosen vendor. Strong contract administration and management oversight will also contribute greatly to the success or failure of a potential outsourcing.

Outsourcing is not a tool that can be used in all instances, but the process can serve as an effective vehicle to analyze and improve many public services. Where appropriate, outsourcing can provide significant opportunities to reduce the cost and improve the quality of public services and should be part of ongoing efforts to ensure that taxpayers are provided with best value by the governments that serve them.