The emergence of the New Public Management (NPM) as a reaction to the drawbacks of the traditional bureaucratic model of public administration has changed the way public services are delivered from monopolistic forms to a more market-oriented system (Adam and Belfour 2010, p.616). Under this paradigm, outsourcing and contracting public services have been increasingly used into areas previously considered to be core government businesses, including the provision of government institution’s security, office cleaning, defence, employment management, custody and prison administration, printing government documents, and the provision of publicly funded social services (Mulgan 2015).
Although generally perceived as a source of greater efficiency and effectivity, outsourcing has always being criticized and challenged. The purpose of this essay is to compare whether shifting public service delivery from ‘in-house’ to external providers has improved the government efficiency, and from this what public managers actually do can be identified. This paper begins with a definition of outsourcing and the motives for its use. It then discusses how government determines what public services to outsource. In the next section it discusses what works from outsourcing and what does not. Meanwhile matters of outsourcing to other organizations, both private and NGOs, will be discussed under risks of increased reliance on contractual delivery.
Outsourcing or contracting out
Outsourcing has different meaning with contracting. According to Alford and O’Flynn (2012), outsourcing refers to the distribution of roles between purchaser and provider, while contracting refers to mean of coordination that often involves specifying, monitoring, creating incentives, imposing penalties, and encouraging competition. Despite these different definitions, outsourcing and contracting are used interchangeably in this essay. Hence outsourcing or contracting out is defined as a contractual arrangement in which government or government bureau, acting as purchaser or principal, purchase specified goods and/or services from a profit oriented firm, non-government organisation, arm’s length agency, or individual, acting as agent or provider (Mulgan 2015, p.9).
Historically, most adopters have been the OECD countries. The proportion of government outsourcing spending in these countries is significant. Based on the 2011 OECD survey reports, on average 44% of government production costs of all OECD countries were consumed by outsourcing (cited in Mulgan 2015, p.7). This figure was only 3% lower than spending on government employees, representing 10% of GDP (OECD, 2013). In Australia, outsourcing has become the most common approach in the delivery of services either to the public or to the government itself (Alford and O’Flynn 2012, p.84). In Australia, for instance, service contracts in the Commonwealth government has increased fourfold between 1991-92 and 1994-95 (Verspaandonk, 2001).
A precondition to outsourcing can be traced to the growth of public choice theory along with its subsequent emphasis on the shortcomings of traditional bureaucratic model in delivering public services. This traditional model is thought to be inefficient and costly because the government bureau is the dominant, if not the only, player in service production cycle (Alford and O’Flynn, 2012). In other words, government holds two positions at the same time, as purchaser and provider. As a result, the politicians and bureaucrats are highly likely to act in the pursuit of their own interests, leading to inefficiency (O’Flynn 2007, p.355). The principal agent theory tries to solve this by separating purchaser and provider, This separation can create a market for the provided public service, therefore, encourages competition among providers, leading to cost savings and efficiency.
Decision to outsource
There is no definite answer to question of how government determines what kinds of services should be outsourced. Particular services in one country or institution might be outsourced, but might not in others. One reason for this is because decision making is pretty much a subjective assessment, depending on one’s theoretical perspective on matters such as the extent to which the private sector should be involved in the government service provision. It also depends on practical considerations such as to what extent services can successfully be outsourced, in the sense that the desired cost savings and service quality will be achieved.
Although the motivations behind government make-buy decision remain not well understood (Lu, 2013), some evidences show that cost savings are common forces driving government to marketize and outsource public services. Cost savings experienced by the adopters of outsourcing system has expanded the use of such an approach (Ferris, 1987). This indicates that cost savings can incentivize government to outsource services. For example, when a study in the United Kingdom found that outsourcing waste collection could reduce costs of 20 %, the outsourcing practices exploded (Cubbin et. al.1987). Besides cost savings, fiscal pressures are considered as driving forces for outsourcing some government businesses. With limited fiscal capacity, government’s political commitments and financial objectives are difficult to be achieved. Under such circumstances governments have to find other operational alternatives, such as reducing public service production costs, and cutting services. Since demand on government services tends to increase overtime, cutting services may be a bad policy option for government, particularly in democratic countries (Ferris, 1986). In this respect, outsourcing is a better option to deal with such restrictions.
Despite motivations behind outsourcing have been realized and researched for many years, there is no widespread consensus or agreement on how government make decision about what public services to outsource. Indeed most might agree that public services such as office cleaning, waste collection, and food catering should be outsourced. Beyond this point, however, agreement is often difficult to make since it involves individual perception (Figgis and Griffith 1997, p.30).
Challenges for public manager in making decision to outsource
On theoretical level, making decisions on which services should be subject to outsource rely on matters such as which government functions that will not create strategic issues if they are outsourced; which government businesses that would not undermine the importance of privacy protection or accountability mechanisms if they are carried out by external providers, and so on (Alford and O’Flynn 2012, p.94). On a practical side, decisions to outsource revolves around matters such as: whether outsourcing would achieve the desired outcomes of cost savings and increased efficiency; and whether the benefits of outsourcing compensate the costs incurred. This indicates that public provisions are likely to be outsourced when the benefits of doing so outweigh the costs (Alford and O’Flynn 2012, p.94).
Market testing is a common instrument government used to examine whether the costs of in-house service delivery are greater than the costs of outsourcing the same services to external providers (Figgis and Griffith 1997, p.4). In practice, however, government often face measurement problems particularly for human and social services. Unlike many hard services such as cleaning, refuse collection and transportation, in the human and social service field, efficiency gains are difficult to be quantified (Lu 2013, p.185). Hence, making decision on whether to contract out is not only a matter of comparing and weighing up service benefits and costs, but also strategic benefits and costs, and relationship costs and benefits.
According to Alford and O’Flynn (2012), weighing up various cost-benefit issues can be addressed by asking three fundamental questions: the strategic question, the service question, and the relationship question.
Under the strategic questions, public services which is unlikely to affect the core-businesses of government can be outsourced whether through arm’s length service delivery, partnership, or private provider (Alford and O’Flynn 2012, pp.102-103). Office cleaning, for instance, clearly constitutes non-core business and has no strategic issue on it, hence, it might be more efficient to outsource such a service to external provider than keeping it in-house. In contrast, public service like detention centre security, which is highly likely the core-function of public institution, should be delivered by the government agency itself. Outsourcing such a service to private provider may raise broader strategic issues. Outsourcing court security service in the Department of Justice of Western Australia is a case in point. A dramatic escape of nine prisoners had raised accountability question, who is responsible and who should pay when such incident occurs? This forced the Department of Justice to take back control of the holding cells at the Supreme Court in June 2004 (Alford and O’Flynn 2012, p.83). Although security service might be considered as non-core competencies, it still may affect the core-function of the court. This raises question on how (and by whom) core business is defined. Answering this question may help to mitigate such problematic issues.
While the strategic question focuses on the core business and core-competences of the purchasers, the service question tends to focus on the potential gains from outsourcing services. If the external providers can provide better and cheaper services than the internal providers can do, then public services should be contracted out to the outsiders (Alford and O’Flynn 2012. Road repair, waste removal, and catering services are great examples of public provisions that should be externalized. Such services are often considered as competitive markets, and generally measurable and observable. The more competitive the market is, the greater the gains can be made from outsourcing (Ferris 1986, p.292). Likewise if the costs of outsourcing outweigh the benefits, while the principal agent problem and market imperfections persist, and goals are difficult to define and measure, then external providers should not be approached (Van Slyke, 2005). Social and human services are examples of public provisions that are often difficult to define, observe and measure.
The last question that should be considered in weighing up cost-benefit issues in outsourcing is the relationship question. This question seeks to answer the shortcomings of the service and strategic questions particularly when a competitive market is absent, and government publicly funded services are difficult to specify and monitor. Social services, such as public housing, hospital, and mental health are examples that illustrate these difficulties (Lu 2013, p.185). In such services, the distinction between what are inherently governmental and what can realistically be contracted out is unclear (Van Slyke 2005, p.4).
Is outsourcing public services really efficient?
Although outsourcing and contracting public services have been dominantly implemented across different levels of government, the promised efficiency gains expected by competitive regimes lack evidence of greater efficiency. There is emerging evidence that shows that such a market mechanism does not necessarily lead to efficiency. A survey by UNI-SON (2011 cited in Alford and O’Flynn 2012 p.87) shows that about 60 per cent of respondents across municipal government institutions in the United Kingdom explained that they were taking over services from external providers to increase efficiency and reduce service costs.
The principal agent theory which tries to create competitive markets by separating purchaser and provider, has not really clarified who is responsible for what, blurring the lines of accountability and control. Indeed, the separation between purchaser and provider for some services like office cleaning, road building, office stationery, and waste collection, will lead to efficiency since the market for such services are competitive. But for services, such as social services with limited external providers, this separation may lead to inefficiency. Contracting social services is much more complicated than contracting for pencils (Benh and Kant, 1999). As noted in a review of UK research in 1991, transactional costs, such as the costs incurred for negotiating and managing contracts, and providing for staff redundancy have been considerably underestimated (Figgis and Griffith 1997, p.28; Entwistle and Martin, 2005). The cost of managing contract itself, based on estimation made by Hodge (cited in Verspaandonk, 2001), is about two per cent of the contract value. The costs of making staff redundant are often caused by restructuring and downsizing of civil servants. This is due to the fact that those who will be displaced are commonly low-skilled, women, and blue-collar workers. These people are unlikely to find new work. Consequently, there will be costs of unemployment assistance. Based on a 1995 study in the UK, downsizing public servants resulted in unemployment costs of $24.4 million ($8 million greater than cost savings made from outsourcing) (Verspaandonk, 2001).
Outsourcing to whom: private firms or NGOs?
Contracting for goods and services, which are not inherently governmental in nature, such as office cleaning, road maintenance, and refuse removal are frequently considered as existing in competitive markets. In such cases developing contract that can align goals and accountability is manageable, efficient, and politically desirable. In other service areas like social and human services (such as public housing, hospital, and mental health), the distinction between what are inherently the core function of government and what are not is often unclear (Van Slyke 2005, p.4). Despite this challenge, outsourcing public services remains due to the limited fiscal capacity government often face, while the demand for services tend to increase.
Under such circumstances, a collaborative relationship between government and non-profit organisations, including NGOs, and civil society groups, is often and increasingly approached as an alternative to private one. Although these services are commonly labour intensive in nature, the non-profit sectors have competitive advantages (such as proximity to clients and local communities, lower costs, the ability to raise funds and cross-subsidize programs, and quick start-up times) against the for-profit providers (Alford and O’Flynn 2012, p.92). However, similar to private firms, contracting relationship between government and NGOs can have unintended consequences and may raise other issues, such as performance measurement (how does public manager manage contracts with NGOs for social services in which the inputs, activities, outputs, and outcomes are not always easily observed and measured?), and decision making (how does public manager determine which NGOs to work with?).
In addition, the increased involvement of NGOs in large scale activities through contracts with government has changed their nature and incentives, undermining the social benefits that should be gained when such non-profit organisations work without any intervention (Van Slyke, 2005). As government steers their activities, they become compromised, decreasing their capacity to criticize and provide public comments on public policy processes (Harris, 2007). The Salvation Army and Mission Australia are two examples of organisation that have been captured through their willingness to work with government (Harris 2007, p. 14). According to Wilma Gallet (cited in Harris 2007, p.14), government control over these two organisations increases, while their discretion and freedom to implement their most truly core missions decrease.
Risks of greater reliance on contractual delivery
One of the common risks of greater reliance on outsourcing and contractual delivery is reduction in government accountability. This, however, remains disputed. On the one hand, proponents of outsourcing (eg, Industry Commission, 1996) commonly claim that there is no negative effect on accountability, meaning that governments, as buyers, remain accountable for the goods and services they agree to buy. On the other hand, scholars and academic analysts (e.g. Harris, 2007; Mulgan, 1997) remain sceptical and seeing definite reductions in government accountability, particularly when outsourcing to private providers. Regardless of this dispute, arguments and evidences revealed by the proponents of decreasing accountability are empirically more relevant with the real problems public sectors face today.
A possibility of accountability deficit can be analysed by answering the question of who are accountable to whom, for what, and how. According to Mulgan (2006), the answers to the first two questions (who, and to whom) remain unchanged both before and after separation of purchaser and provider, while the answers for the “how (mechanism)” and “what (the scope)” questions are, to some extent, changed. When contracting out public goods and services, government’ position in answering for the action of provider is changed before and after the split. Before the purchaser-provider split, government can issue direct instructions to a government department to answer the action of provider. Meanwhile after the split, government is not in that position anymore.
At the same token, other government agencies, such as audit agency, and members of the public have no direct access to private providers, and rely on what the government (purchaser) can tell them (Mulgan, 2006). This is partly because the contract is only between the government (purchaser) and the contractor. Thus those who are not in the contract have no legal rights for asking questions directly to the private provider. Again, this significantly reduces public rights of legal accountability. Mulgan further explains that even though agencies are obliged to report all contracts to the parliament, the scope of the report is not presented in actual details, lacking of transparency. All these undermine transparency and lead to corruption practices.
Relying on contractual delivery can also raises unintended ethical issues. This is what happen when the State Department of the USA contracted out government’s security to a private security firm (Blackwater USA) to protect senior officials and construction projects during the war in Iraq. This, however, had resulted in terrific socio-political problems. About 10 soldiers and unreported numbers of Iraqis were disabled when the private security firm released gasses from helicopter to clear the way for its convoy, while 17 local citizens were murdered at a check point in Baghdad (Adams & Belfour 2011). This particular example explains how public sector’s arenas are inherently different from private ones.
Under NPM paradigm, market mechanisms such as specification, competition, and purchaser-provider separation that are considered could lead to greater efficiency, has not contributed significant cost savings to maintain public service delivery. Theoretically, market mechanism should can do that. However, pure market mechanisms often do not work in the public sector in which uncertainty, asymmetrical information, and high-cost monitoring exist (O’Flynn, 2007). Outsourcing and contracting out public services, particularly to private sectors have undermined the most fundamental values of public service. Public Private Partnerships (PPP) is considered can solve the shortcoming of contractual transactional relationship between government and private sectors. Although to some extent this might be true, outsourcing public services to NGOs may also result in unintended outcomes. Too much reliance on contractual delivery risks public sector values that public managers should articulate and manage. Thus, adopting public value perspective may represent a new paradigmatic transformation.
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