Short on Oversight

States and localities are outsourcing more of their services, but management of the contracts is in dire need of an upgrade.
May 2006
Barrett and Greene
By Katherine Barrett & Richard Greene  |  Columnists
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The exact numbers are a mystery. Even Khi Thai, director of the Public Procurement Research Center, says that "no one even really knows the extent of outsourcing in the states." The best guess is that somewhere between 15 and 20 percent of all state spending is contracted out to third parties. That adds up to a total that may be in excess of $200 billion.

The real trouble isn't in the numbers. It's in the absence of solid management for privatized service contracts. Problems are common all along the route--from the decision to outsource a government service, to overseeing the effort, to ensuring that the contractor delivers what's promised.

Since successfully contracted efforts don't often get a lot of attention--and there are certainly plenty of those--the spotlight tends to fall on the failures. There any number of examples that have grabbed headlines in recent months. In early February, members of the Wisconsin legislature's Joint Audit Committee called for a massive review of contracted IT projects: A contractor had made a donation to the governor's reelection campaign weeks before his company was awarded a no-bid contract. A few weeks before that, the Texas auditor's office found multiple shortcomings in an $85 million privatization effort at the state's social services agency.

Scandals aside, the public sector usually follows the lead of private businesses in latching on to management trends. But there's a real irony in large-scale outsourcing. It emerged in the public sector before it became commonplace in the private sector--states were already entering into large contracts for claims processing for Medicaid in the late 1960s. And yet, corporate America seems to have jumped ahead of governments when it comes to managing this field of endeavor.

With that in mind, we took great interest when we recently came across a report issued about a year ago by Deloitte Consulting. It's titled "Calling a Change in the Outsourcing Market." And although a few governments were interviewed in the research for the report, it focused almost entirely on the private sector. We chatted with a couple of representatives at Deloitte and discovered, as we had suspected, that there are a great many lessons in the report that apply to governments as much as to corporations.

One point to start with is to take outsourcing seriously as a significant management discipline. "Outsourcing management is a competency unto itself," says Ken Porrello, a principal in Deloitte Consulting. "You need people on board who have done it before."

That just makes sense. And many states have people with those abilities situated in whatever office oversees statewide procurements. But many of the biggest contracts emanate from the agencies themselves, where expertise has never been developed.

As the potential contract moves from planning to procurement, the government in charge of the contract needs to stay in control. "You can't believe that outsourcing allows you to have others do the oversight," says Bob Campbell, national managing director of the public sector for Deloitte. "We see governments heading out sometimes with broad statements of objectives, thinking they can place a lot of reliance on commercial innovation." This, he suggests, is a prescription for disaster.

Another piece of advice from Campbell falls into the category of "Trust your mother but still cut the cards." Campbell says that there's an idea that if you get a financial bid that saves money, everything else will follow. "Don't believe you're going to get something for nothing," he says. "As part of the evaluation, it's critical to focus on the contractor's financial capacity and its financial position relative to its capacity to make the commitments it's making in the proposal."

A few other ideas from Deloitte:

  • Talk to vendors before issuing a formal request for proposal. This is an excellent time to learn state-of-the-art information from the vendors--without spending a dime. It's a way to ensure that, from the beginning, the project itself is conceived at as high a level as possible.
  • Establish clear performance measures for the contract and make sure that vendors understand precisely what they are at the outset. This might include service levels for things such as timeliness, desired accuracy, frequency of service and numbers and qualifications of vendor personnel committed.
  • Allow a reasonable amount of time for vendors to come up with good responses. Too little time just means that the proposals will be inferior, less innovative and more prone to assertions that don't pass the test of time.