Outsourcing Perversity

Government outsources tasks that it shouldn't, and fails to outsource tasks that it should.
July 5, 2006
By John D. Donahue  |  Contributor
John D. Donahue is a GOVERNING contributor. He is the Raymond Vernon Lecturer in Public Policy, faculty chair of the Harvard Kennedy School Case Program and the SLATE teaching initiative.

There's a lot of talk in public management circles about outsourcing (also known as contracting out, competitive sourcing, or privatization). Enthusiasts point to cuts in cost and gains in flexibility thanks to private involvement in government's work. Skeptics raise the alarm over accountability gaps and corruption. Both sides tend to assert or imply that outsourcing has suddenly transformed government and, to this extent, both sides are wrong. True, outside providers account for nearly 35 cents of every dollar the public sector spends on services. However, it was already 25 cents in the early 1960s. Outsourcing has been with us a long time, and the growth has been slow. The level of governmental outsourcing is less interesting than the pattern, and that pattern is often perverse. Government outsources tasks that it shouldn't, and fails to outsource tasks that it should.

A full account of the criteria that determine whether a task is suitable for outsourcing would include many layers of rationale, exceptions, nuance, and caveats. Nevertheless, three characteristics capture most of the story.

Specificity: You can only delegate what you can define. Splitting off a function requires specifying it in sufficient detail to solicit bids, select a provider, and structure a meaningful contract. So tasks that are predictable, stable and separable from the rest of the value chain are good candidates for contracting out. For those that are entangled with other functions and subject to continual revision (in timing, scale, or nature), the appropriate contractual form -- you pay me to hang around and follow your instructions as you figure out what needs doing -- is what we call "employment." It is technically possible, of course, to rely on outsiders for ill-defined and changeable tasks. But for a range of reasons -- most too obvious to mention, and a few too technical to get into here -- this is usually not very smart.

Ease of Evaluation: To outsource a function you not only need to be able to say what you want (specificity), but you also need to know what you've gotten -- clearly enough and early enough to do something about it if what's delivered isn't what was promised. The easier it is to monitor performance and assess the quality of the work, the more safely a task can be delegated. For many functions, fortunately, it is not too hard to distinguish between a good job and a bad job. But other tasks resist clear evaluation. Outcomes may be inherently ambiguous or opaque. Consequences may play out over a very long period of time. Results may have multiple causes, making it impossible to infer good or bad efforts from a good or bad outcome.

Competition: Private providers tend to outscore government on productive efficiency. Not because there is something magic about privateness; they are efficient because they have to be. Market competition weeds out the laggards and keeps the winners in a state of healthy anxiety. Without competition, much of the rationale for outsourcing collapses. Passing a task from a public monopoly to a private monopoly is seldom very helpful. Opting for outsourcing when competition is weak or absent is to forfeit, whether knowingly or not, much of its advertised efficiency edge.

The same criteria apply to private sector, make-versus-buy decisions. Companies outsource functions that can be specified, evaluated and competitively sourced. Often public organizations do, too. But, there's a peculiar tendency for government to get its outsourcing backwards.

Government keeps lots of eminently outsource-able functions in-house -- tasks that are relatively well-specified, open to evaluation and offered by many rival suppliers. At the local level, many support tasks in public schools meet these specs -- cleaning and maintenance, food service, landscaping -- but the share of support staff on public school payrolls is about the same today as it was in 1969. At the state level, there are over a hundred thousand highway maintenance workers, to name just one large category of public employees doing easy-to-delegate tasks. And at the federal level, well over half a million postal clerks and mail carriers do the kinds of work routinely outsourced in the private sector.

At the other end of the scale, government often outsources tasks that are tough to specify, hard to monitor and evaluate, and subject to little or no competition. Two huge growth areas for public sector outsourcing are human resources management and comprehensive information technology systems, functions far too entangled with an agency's operations to permit bright-line specification or clear evaluation. NASA delegates nearly all launch services for the Space Shuttle to a company with no competitors.

For a long list of reasons, military tasks are especially hard to delegate accountably. Until recently, the Defense Department outsourced less than civilian agencies. But since the turn of the century, military outsourcing has surged, and the share of defense services delegated to outside suppliers is now considerably higher than non-defense Federal services -- and much, much higher than for the state and local services for which outsourcing more often makes sense.

What explains this perverse pattern? I think I know, but I'd appreciate your thoughts. I'm just finishing a book on the topic, and will discuss it further in a future Management Insights posting. Meanwhile: Watch out for perversity in your own organization's outsourcing decisions.