The Global Context. Australia is not alone in expanding its use of outsourcing.
A report by the OECD 23 documented a range of case studies, including:. Denmark contracting out hospital cleaning services Iceland contracting out residential treatment homes for children with behavioural and emotional problems the Dutch Tax and Customs Administration contracting out printing services New Zealand contracting out audit functions United Kingdom Inland Revenue contracting out information technology services, and the Indianapolis Airport Authority USA contracting out the management of the airport.
Anglo-American democracies, in particular, have enthusiastically adopted outsourcing. This may be due to their relatively low levels of taxation, leading to greater budgetary pressure, or perhaps to a more general willingness to converge the public and private sectors. The United Kingdom was an early convert, with the introduction of compulsory competitive tendering for local government services with provision for in-house bids in and the subsequent contracting of other functions.
However, New Zealand 24 has been portrayed as implementing a particularly comprehensive contracting agenda. The federal structures of the United States, 25 Canada 26 and Australia make these countries' approaches more difficult to characterise. However, all three have increased their use of outsourcing since the s. However, a overview by the Treasury Board Secretariat indicated that the annual growth rate of contracting for the Federal Government had been significant, particularly in areas such as translation and interpretation services, dental services, consultancies and welfare services.
The Debate about Outsourcing. Outsourcing is an issue that generates controversy in several different contexts:. Although the Hawke and Keating Governments expanded the use of outsourcing, it is identified more strongly with the Coalition. The Australian Labor Party has distanced itself from the Coalition's approach by announcing that, under a Beazley Government, outsourcing would be subject to a public interest test and in-house bids would be facilitated 28 outsourcing can divide the government of the day and parliamentary committees including some members of the governing parties.
The concerns of committees often revolve around accountability provisions see discussion under 'Accountability' in the following section commentators e. At stake are values and interests. Values might include the importance of accountability and the efficient use of public resources. Decisions about outsourcing can set different values in competition, forcing difficult choices to be made and introducing ideological considerations. Examples of interests at stake include value for money taxpayers and the government , the maintenance of public sector jobs public sector unions , profit private sector , expanding role in society voluntary sector , autonomy executive government , scrutiny of the executive the Opposition, parliamentary committees, the Auditor-General, the Ombudsman and the media and service quality clients.
This paper focuses on arguments over which there is some basic common ground-that is, people generally agree that efficiency, high quality and accountability are good things, even if they disagree about whether outsourcing enhances them. Therefore it does not discuss issues over which there is fundamental conflict, such as whether outsourcing is harmful because it reduces public sector employment, or whether it is good because it enhances the growth of the private sector relative to the public sector.
Similarly, the paper focuses on arguments that relate to the public interest rather than to sectional interests such as the rights and welfare of public sector employees. The arguments that follow can be viewed in two ways. They can be understood as the 'ammunition' of those who argue for and against outsourcing in general terms. Alternatively, they can be viewed as factors which may need to be considered when individual outsourcing proposals are raised.
The purpose of this paper is to introduce the reader to the main arguments in this debate. This has involved simplifying complex issues and presenting them relatively uncritically.
Arguments used to Defend and Criticise Outsourcing. Four critical issues-efficiency, quality, accountability and the strength of civil society-are invoked as arguments both supporting and criticising outsourcing. Efficiency Gains and Cost Savings. Efficiency gains and subsequent cost savings are commonly cited as reasons for outsourcing.
There is no single answer to the question of whether outsourcing saves money. This is because of differences between situations, the range of factors that need to be considered, and measurement issues, all of which are discussed below. Supporting the mainstream view, the Industry Commission argued in that competitive tendering and contracting CTC : The Commission went on to argue that, although there was limited knowledge of the costs associated with transition, contract management and internal management, contracting would still generally provide net savings for the Commonwealth.
Thus he concluded that 'CTC processes should not be applied in a manner that conflicts with higher priority policies'. According to Monash University researcher Dr Graeme Hodge's report, Privatisation: An international review of performance , contracting whether to a private or public sector organisation offers significant cost savings. He notes that:. There was no general tendency for private provision to be any more cost-effective than public provision of services under contract. Hodge's findings raise the possibility that efficiency gains from contracting may be due more to the discipline imposed by the enforcement of a written agreement than to the efficiency of the private sector.
If this is correct, then one way to capture the efficiency benefits of contracting while avoiding the potential problems discussed below, could be to make greater use of purchaser-provider relationships within the public sector. As the following factors demonstrate, cost savings from outsourcing are not a foregone conclusion.
Like the other issues discussed in this paper, efficiency gains are variable and need to be determined on a case by case basis. Cost savings vary depending on the service being outsourced. Some services e. The review found no difference between the effectiveness of contracting through the private or public sectors.
It also found that the changed environment could lead to efficiency improvements in areas that had not been outsourced:. Results for agency costs in areas adjacent to those areas actually contracting services showed effect sizes of around two thirds that of those areas contracting out. It was concluded that although these areas were not themselves actually contracting out services, the threat of competition and the acquisition of new financial performance knowledge itself also led to real performance improvements. The Australian National University's Professor Richard Mulgan, a commentator on issues relating to government outsourcing, outlines his overall 'rules of thumb' thus:.
Savings are most likely from contracting out where the required service can be easily specified and monitored, and where a competitive market of potential suppliers exists independent of government patronage. Cleaning, catering and rubbish services are standout successes world-wide. Conversely, if the service is complex and requires constant quality control, savings tend to be eaten up by monitoring costs. If there are few alternative suppliers, governments can easily become captive to monopolistic exploitation.
Wider economic effects also need to be considered: will a decision to outsource stimulate local economic activity and develop local skills? Or will the contract be awarded to an overseas company which will import its own expertise and repatriate the profits? Cost savings can vary significantly depending on the circumstances. Several factors need to be considered in determining whether it will be more cost-effective than in-house provision.
These include the following:. Labour-saving efficiency gains will make labour available for other productive activity, although costs associated with unemployment may need to be offset against this benefit 39 the cost of managing the contract. For example, Hodge refers to a study in the United Kingdom which calculated that local savings of However, he also refers to a United States Department of Defense study which found that employment displacement costs were very slight compared with the department's estimated savings, and 43 the potential costs resulting from the inflexibility of a contract.
One of the advantages of outsourcing is that the purchaser's requirements are specified in the contract and the contractor is required to deliver them for an agreed price. However, this can entail reduced flexibility for the purchaser. If an unanticipated service is required, the government may have no option but to purchase that service from the contractor, who will enjoy monopoly status. Measurement Issues. Different measurement methodologies may result in disagreement over the extent of savings generated by outsourcing.
It has been argued that non-government providers may deliver a superior level of service. For example, the former Commonwealth Department of Health and Family Services described contractors as having the potential to be innovative, flexible and responsive. Direct government provision was said to have a tendency to:.
Non-government organisations, it can be argued, bring a different approach to client service. Outsourcing may also provide clients with a choice of service providers. For example, the Job Network enables job seekers to select an agency to assist them. As well as potentially enhancing quality through competition between providers, a greater range of service delivery options may mean that clients find a provider that suits their particular requirements.
The evidence on this issue is inconclusive 49 and quality is also invoked as a reason not to outsource. A parliamentary committee inquiring into outsourcing of welfare services heard evidence that the cost of tender preparation had 'forced many small agencies to divert resources away from the provision of services', and that continuity of service could also be compromised. Even the spectre of financial penalties for poor service does not necessarily ensure high standards.
Another aspect of the quality issue is the wider role that government service provision may play in a community. While a particular outsourced service may continue to be delivered, associated benefits such as regional employment that may have accompanied government provision of the service may be eroded. In evaluating quality levels under outsourcing, care must be taken to distinguish between contract failure and market failure. A problem may indicate poor contract management e.
For example, a prison riot under private management does not necessarily demonstrate that prison management should not be outsourced. In this context, accountability refers to the capacity of clients and citizens to secure an explanation and, where appropriate, redress for actions taken by contractors on behalf of the government. While some types of accountability ministerial and managerial can be said to be maintained or enhanced by outsourcing, other types the capacity for scrutiny and redress may be significantly undermined. According to the Minister for Finance and Administration, ministerial responsibility is not diminished by the use of contractors.
He noted that:. At the end of the day agencies remain accountable to the Government, to the Parliament through their Minister; and to their clients, whatever method of service delivery is used. This view appears to be supported by the experience of the Minister for Immigration and Multicultural Affairs. Concerns about the quality of service provided by privately managed detention centres have been raised, and responded to, in Parliament.
Contracting may enhance managerial control. For example, by requiring a contracting agency to specify clearly the service to be delivered and the allocation of responsibilities, it is easy to identify the cause of any failure. Managerial accountability is increased where detailed contractual provisions allow ministers or government officials to exercise more effective control over contractors than they do over subordinates in their own departments.
However, he goes on to note that other aspects of accountability e. Therefore, for sensitive services e. Since then, government outsourcing has come a long way. While much of the world is experiencing slow growth and recession, the transfer of responsibility for the delivery of services to nongovernmental entities has become a growth sector. Between and , government outsourcing grew 3. In the U. Yet despite this spending, outsourcing continues to face considerable challenges, particularly when it comes to large and complex long-term agreements.
The challenges stem primarily from the conflicting interests of government, which aims to get the most for its money, and providers, which typically are looking to maximize profit. Getting these elements right can be as critical to success as the written contract itself. Outsourcing expanded dramatically in scope and scale between and , with the U.
On average across the OECD, nearly a quarter of government spending is on outsourcing, but there is a great deal of variation, from around 12 percent in Mexico to as much as 38 percent in the Netherlands. See Exhibit 1. Under these outsourcing deals, the government remains the ultimate financer of the service, with a legal contract outlining the details of the arrangement.
As the scale of outsourcing has expanded, its complexity has increased. Outsourcing has moved beyond transactional services, such as waste collection and property management, to include services such as care for the elderly and the disabled. But with increasingly complex outsourcing arrangements have come missteps. Such disputes are hardly surprising. Recent research conducted by graduate students at the London School of Economics found that larger projects are less likely to succeed than smaller ones and that those with multiple objectives have lower success rates than more focused deals.
See Exhibit 2. One of the reasons that outsourcing arrangements go wrong is that governments rely too heavily on contracts to manage complexity. Often their aim is to write the perfect contract—one that anticipates all possible eventualities—so that the legal system can be used to hold providers accountable for failure. The downside can be significant. In , London Underground, the government body responsible for public transportation in the city, struck a 2 million-word contract with two consortia to maintain, renew, and upgrade Victorian-era tube lines.
The contract was so detailed that it defined, among other things, the minimum size of litter that contractors were required to collect. In the end, the contract did not insulate the government from the financial problems experienced by its providers, and by , the work of maintaining and upgrading the underground was back in government hands. Of course, any outsourcing deal does require a solid written agreement to detail terms on pricing, performance, grounds for termination, and policies for altering the deal.
But governments that focus solely on contracts to define their outsourcing arrangements are missing an opportunity. Smart outsourcing is a set of tried-and-tested techniques that drive the development of a more intense, collaborative relationship between governments and providers. And while these techniques, used in both private- and public-sector organizations, add costs—including additional human-resource expenses—they increase the odds of success.
The investment makes sense for contracts that meet some of the following criteria:. We have identified five techniques that, when executed successfully, address some of the most challenging aspects of large, complex outsourcing deals. Embed government people with the provider. This carries over to their life insurance packages—a complaint of the Chilean hired unit is that their contracting firm chose a poor one without their understanding—or the backup support they guarantee—some firms pay the cost of having a quick-reaction force in place, ready to rush to the rescue, while others save money by hoping for the best.
Another important difference between the PMFs and the military is that even individual members of firms can weigh the risks in deciding their own involvement. As one Halliburton employee departing Iraq commented, after his truck blew up underneath him in a convoy attack, "It was time to come home. When asked why, he replied, "Are you kidding?
I will fly into Kuwait. I will fly into Jordan. I will not fly into Iraq. Every industry has its winners and losers, but the price of establishing those in the private military world is different than in other marketplaces. This issue is compounded by the lack of formal weeding-out processes or the establishment of minimum capabilities, inherent needs in the military environment. One Special Forces veteran goes further: "How these contractors operate is determined by the individual companies.
Within the private military industry itself, the killings in Fallujah were shocking but not unexpected. As opposed to the first few months of the war, when contractor attrition was rumored to be as high as 30 percent comparing quite poorly to the zero percent of U. Indeed, two contractors working for the Olive Security firm had been killed outside Mosul just days before the Fallujah incident, the main difference being that their deaths were not recorded on film.
However, the Fallujah incident, followed so rapidly by the mass violence and the incidents in Najaf and Kut, caused most of the firms to reexamine their procedures, risk factors, and reliance on military support that may not be there. Disturbed by the upswing in violence and the lack of military backing and coordination, at least four military contractors Halliburton, Triple Canopy, AKE and Control Risks were reported by journalists and CPA officials to be reconsidering the extent of their presence in Iraq, and they suspended key parts of their operations as they waited for the situation to settle.
The pay scale remains so high that those leaving will likely find ready replacements. In the days after the killings, I was contacted by two firms looking for advice on how they might crack the market, including one that had never operated in a war zone before. Who knows, perhaps the PMF bubble may last longer than the dot. The greater challenge looks to be how the broader business community responds to Fallujah and its aftermath. It was hoped that the massive infusion of aid would draw in outside business and create an upsurge of employment that would dry out the insurgency. But, instead, the Fallujah killings and the ensuing outbreak of fighting in six cities might have sucked the wind out of the corporate participation necessary to making the plan a reality.
Those already on-site have restricted their movement and activity "no go" areas have ballooned , while a number of other firms set to enter the country have cancelled. The head of the firm Meyer and Associates, which provides protection for a number of contractors, reports that "right now everything is at a standstill. The meeting was to highlight business opportunities in postwar Iraq, with more than companies scheduled to attend.
The day after the killings, it was postponed.
So while the PMF industry has boomed, the accompanying investment needed to prop up the Iraqi economy has not which could indirectly undercut the PMF industry in the long term. As one potential investor commented after a U. But this is below the ground floor. There are too many other markets now that are stable. This reluctance derives from more than a fear of going into a war zone; rather, it represents real financial calculations.
As the situation has grown increasingly dangerous, insurance premiums have skyrocketed. Because the Defense Department had no policy on it beforehand, Bunny Greenhouse, chief contracting official for the Army Corps of Engineers, relates that for contractors in Iraq as much as 40 cents of every dollar is spent on insurance. In turn, security costs have escalated, which is a boon for the PMF industry, but not for the broader effort. Many construction firms, such as Washington Group International, now have to employ two security personnel for every one worker carrying out the actual contracted task.
Just before Fallujah, Stuart W.
Bowen Jr. If the present spate of violence continues, industry insiders think it might grow to as much as 20 cents per dollar. As a point of comparison, security costs for oil operations in war-torn Colombia average about 6 cents per dollar. Bowen writes, "The inability to accurately predict the costs of security, including insurance, raises questions about the need for more funding—Iraqi, donor, or U. While Bush was trying to make a point about U.
More important, it has done so in an ad hoc manner, without public awareness or discussion. The private military industry is such a new phenomenon that most in Congress remain unaware of it.
In turn, the issue is highly susceptible to partisan rancor, mainly because of the identity and political practices of some of the firms. For instance, simply mention the name Halliburton in a congressional hearing and the battle line is already drawn. In the wake of the shock over Fallujah, this may change. They have also requested that the Pentagon begin to adopt written guidelines, with legal justifications, for the rules of engagement the firms must follow, as well as how they will be coordinated with U.
Defense Secretary Donald Rumsfeld has not yet responded. Those are good first steps, but they do not go far enough. To put it in economic terms, privatization always comes with both positive and negative externalities. The onus is not on the contracting firm, but on the client, in this case the U. We must set up the processes needed to maximize the positives and minimize the negatives. A clear examination is needed to bring higher standards and greater clarity into our current and future military outsourcing decisions. This need goes beyond tracking the armed personnel.
It includes a basic accounting of the broader realm of contractor forces, public transparency of contractor casualties, and an examination of what is being spent. The U. We need far better financial scrutiny of contract competitions, awards and oversight to ensure that money is being saved through outsourcing no formal study has yet proven this.
Outsourcing of commercial activities in the Department of Defense (DoD) occurs within a Modeling the Impacts of Outsourcing on Civil Service Employees. Page 1. Page 2. Page 3. Page 4. Page 5. Page 6. Page 7. Page 8. Page 9. Page Page Page Page Page Page Page Page Page
Serious thinking must take account of such fundamental military questions as command and control, rights and responsibilities for both the good and the bad times, legal status, and the establishment of industry standards on recruiting, procedures and intelligence. We should also take a step back and examine the overall trend, rather than continue to breathlessly outsource.
Just because we can turn something over to the private market does not always mean we should.