Chip Off the Old Block

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Chip Off the Old Block
By Kathleen Goolsby, Senior Writer

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holding a microchip Just as children tend to closely take after one of their parents, government outsourcing and privatization projects are beginning to resemble the private sector more and more. Growing up is a v-e-r-y s-l-o-w process, but lessons learned and examples followed are producing new and better results in government efforts to increase its efficiency and quality of performance. Adrian Moore, director of privatization and government reform for the Reason Public Policy Institute, talks to Outsourcing Journal readers about what they can expect to see in this arena during the year 2001.

Drivers

A certain amount of outsourcing is driven by fiscal crisis, producing a need to cut costs; so if the boom continues, the government will be relieved of some pressure to outsource. There are countervailing forces, though, Moore explains. "Good economic times are not evenly distributed across governments. A lot of states are experiencing budget surpluses, and a lot of local governments are very financially strapped. Also, the federal government currently has a budget surplus, but there is a lot of pressure to use that money for other purposes than to alleviate agencies' financial pressures."

He points to an increasing government trend to outsource for reasons other than saving money and says that objectives such as access to technologies, greater flexibility, access to skills or staff that government agencies don't have and speedier projects are current motives. Those objectives are driving the increase in outsourcing.

New U.S. President and Congress Will Affect Outsourcing

At the federal level, the amount of outsourcing will be affected by Bush's plan to constrain the size of government. "Whereas the campaign promises of Gore included a very specific pledge not to do any privatization, Bush's basic plan to fund his tax cut and other projects depends on doing a fair amount of privatization and public-private competition," Moore states.

He explains that the new federal government will be faced with funding challenges over infrastructure. Water pipes are reaching the end of their natural life. Environmental standards require new technologies and new training to treat sewage so that it is clean and that water going into pipes is clean. Streets need repair, and new freeways need to be built. Electric utilities are faced with deregulation and restructuring. All of these require the government to consider outsourcing as a solution. "This next Congress will deal with a whole lot of infrastructure funding issues," says Moore. Should it be funded locally or by the federal government? Will the money come with strings that help or hinder outsourcing?

Trends

Moore notes several trends in government outsourcing that are currently developing.

Contract Management

As governments outsource more and more, contract management becomes a big issue. "Until now, this is an area that has been underresourced, and the personnel are undertrained. The fact is, contracting is becoming central to government services much faster than people are recognizing that contract management is actually an important career track," says Reason's analyst. He predicts that many governments - at all three levels - will soon run into problems because there will be a lack of well-trained personnel with an understanding of how to integrate contract management into overall policymaking. "The more traditional decisionmaking folks have a hard time figuring out how to work with the outsourcing relationship manager." He predicts that in 2001 we will "see the first really serious engagement of government managers realizing they need to start thinking about this."

Big Deals or Small Deals?

Moore says we'll see some of both. State and local governments will follow the lead of the City of Memphis, which recently outsourced its entire IT system or the State of Pennsylvania, which did the same thing using a slower approach. There will be a few big federal government contracts and some big deals on the state level, but he posits that the vast majority of deals will be smaller and project-specific.

Areas of Significant Growth

Besides the nation's infrastructure, Moore identifies two areas of increasing growth. The eGovernment trend is "going gangbusters," and the majority of the management of eGov portals and services is being outsourced. The cost of new hardware and staff to keep up with the technology is prohibitive for the government. Social services outsourcing (management of benefit assessment and benefit distribution) is on the rise. These functions combine a mix of customer service and data management, and outsourcing those functions is driven by a demand for increasing successful results. Most of this work is at the county level.

Incentive-Based Pricing

Change is slow, but Moore says many government contracting specialists now recognize that incentives are the best way to achieve desired results. "The effort to actually convert contracts over to an incentive basis is still great," he comments. "But the proportion doing so grows slowly each year and is clearly a continuing trend."

Knawing Away at the Biggest Bone of Contention

Perhaps the biggest issue in government outsourcing is the concern about what happens to employees when outsourcing occurs. "It's a far bigger issue than in the private sector because of the political dimension," explains Moore. In the private sector, this concern doesn't drive the decision process, but in the government, it often drives the decision. "Statistically only 7-10% get laid off because of outsourcing. Most are shuffled to other government jobs or take a position with the outsourcing contractors."

"We are hearing a lot more serious discussion about using more complicated mechanisms to manage transitions," says Moore. Private-sector retirement packages are not as juicy as the government plans, so government workers take a significant hit even if the pay scale is commensurate. "In the last year, government and private sector contractors have been trying to solve the portability problem - how to make government pensions follow people into the private sector. It has always been a big political bone of contention, and the discussion on how to contend with that is maturing. I would hope that at the end of this next year we could look back and say we made some real progress there."

Lessons from the Outsourcing Primer:

Government objectives for outsourcing are less often to save money and more often to achieve access to technologies, greater flexibility, access to skills or staff that government agencies don't have and speedier projects.
As the government outsources more and more, contract management becomes a critical issue for success.
2001 will see an increase in government outsourcing because (1) Bush's basic plan to fund his tax cut and other projects depends on doing a fair amount of privatization and public-private competition, and (2) the federal government will be faced with funding challenges over infrastructure repair.

Publish Date: January 2001

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