Privatization: Transformation or Efficient Obsolescence?

Managers face two major challenges: how to protect their constituent's values and, of course, how to succeed in their policy goals.
May 2, 2007 AT 3:00 AM
By Stephen Goldsmith  |  Contributor
Professor of practice at the Harvard Kennedy School and director of the Innovations in American Government Program

It's easy for states and cities to save money -- they can simply do less or do things less well. But saving money by privatizing an obsolete service to make it more efficient doesn't constitute a very meaningful definition of success. Absolute efficiency is not a very significant accomplishment either if the consequence is to deprive hard-pressed citizens of critical public services.

A more meaningful goal of privatization -- to produce better or more services for less money -- is achievable with the right degree of government leadership. As government undertakes more and more work through private companies, the roles and responsibilities of networks expand. Government must move from controlling the delivery process to controlling important public values such as transparency and accountability, which I discussed in last week's column. Managers responsible for these networks face two major challenges: how to protect their constituent's values and, of course, how to succeed in their policy goals.

No doubt, privatization initiatives are proliferating at all levels of the public sector. Private neighborhoods and fully private municipalities are sprouting up in suburbs nationwide. Downtown, successful urban renewal increasingly relies on public-private partnerships such as the Anacostia Waterfront Corporation that I chair in Washington, D.C.

At the state level, numerous governors are considering significant private-sector involvement in financing infrastructure development and maintenance. Meanwhile, Illinois, Texas, Michigan, New Jersey and other states are tossing around the idea of selling their lotteries to gaming companies. Each of these initiatives produces opportunities and substantial challenges; structuring deals in order to produce the best value for taxpayers involves enormous complexity.

Outsourcing within federal agencies is even more common, yet also more troubled. Think contractor abuses in Iraq, difficulties with the TSA and GSA, Walter Reed Medical Center, and the unraveling of the Coast Guard's once-feted Deepwater program.

Privatization may be speeding ahead, but why does it at times appear to be heading in the wrong direction?

The truth is that many privatizations today are pushing the envelope; certainly most would be unrecognizable to the Thatcher/Reagan era. Public officials are still looking to add value while selling government-owned property and other resources. But today's most innovative leaders are partnering with the private and nonprofit sectors to provide creative solutions to some of our most complex and entrenched public problems.

Steering privatization in the right direction -- to more success and less failure -- is possible, but it will require direction and diligence from public managers.

The principles that I've previously written about remain true for these ground-breaking public-private partnerships: Treat employees fairly and wisely; control results rather than processes; establish benchmarks early; mind the flexibility/accountability tension; and ensure effective and transparent contract monitoring.

Yet this new generation of privatization, naturally, will also require new principles. Indiana is one state whose creative and courageous efforts offer three new lessons for officials planning large-scale, market-based solutions to meet the growing demands of their constituents.

Governor Mitch Daniels completed the much-written-about, long-term lease of the Indiana Toll Road, producing needed infrastructure funds for his state. Now, Indiana is outsourcing its gateway to Medicaid, TANF and food-stamp programs that benefit almost one in six Hoosiers in need. A coalition of private partners led by IBM will modernize the state's eligibility system by replacing broken business processes, refocusing on consistent and convenient customer service, and meeting the federal TANF benchmarks long neglected by the state.

It's too soon to tell if Indiana's unique approach to transforming this public service will succeed. The performance promises and savings, however, look good. This early in the game, what lessons can we safely say Indiana officials have taught us?

First, remember that the perfect is the enemy of the good. As complex transformations like Indiana's become more common, the temptation to over-step will grow. But even large-scale projects require common-sense limits. In Indiana, officials decided to focus only on revamping business processes at first -- no new policy, no new computer system. While some of these changes would have been desirable and are likely inevitable, putting them on the back burner allowed the state agency to invest its available management and financial resources in the one area it considered most important.

Second, add "bench strength" as needed. Today's reality is that the government workforce is increasingly deficient in important skill sets at the top. Expediency requires that public-agency managers often have to bring in people with experience in risk analysis, procurement, negotiations and contract monitoring. Indiana officials contracted with consultants to perform an audit of the entire Family and Social Service Agency, but also to benchmark baseline spending and performance of its eligibility system in particular. They hired consultants and attorneys to help with the negotiations, and will spend millions annually on an outside firm just to monitor the billion-dollar contract.

Third, negotiate partnerships as a positive-sum game. A true partnership requires that both sides benefit, but public officials too often approach procurement, especially contract negotiations, in an adversarial fashion. In reality, not only do both sides need to gain for the system to work, but contractors will have greater incentive to ensure good performance and to invest throughout the life of the project if they see benefit. Indiana officials early on adopted a collegial, collaborative tone in the state's relationship with the vendor and communicated this approach to their entire team.

The current scope and rules of privatization will continue to change and evolve. While risky at times, it is in this space that true innovation will happen. And, ultimately, innovation is the reason that managers should consider partnering with the private sector in the first place.