From Suppliers to Sophisticated Shoppers | Article

glowing cd and cableWhen government agencies first started outsourcing, cost was the sole consideration. Over the last decade, however, “cost is losing its market share as a reason to outsource,” observes Adrian Moore, director of privatization and government reform for the Reason Public Policy Institute, a Los Angeles, California think tank that studies government management.

Today, other issues have risen to the top. They include:

  • The need for flexibility.
  • Quality improvement.
  • Innovation.
  • Access to personnel or skills that agencies don’t have in-house.

As these factors have become more important, the kinds of processes that governments have elected to outsource are changing. In the old days, simple processes like trash collection and road construction were governments’ first foray into outsourcing. It was easy to run the numbers and calculate costs to make a sensible decision based on dollars and cents.

Now the driving force behind government outsourcing is to gain access to new technology or to improve the quality of the services delivered. Outsourcing IT or social services are more complex processes. “With more complicated services, cost becomes less important,” reports Moore.

More For The Money

In some cases, outsourcing these complex processes may end up costing the government agencies more actual dollars than performing them in-house. But the agencies receive more quality and efficiency.

In the IT area, Moore says “it doesn’t matter” how much money government agencies save by keeping IT in-house if that decision keeps the agency “light years behind.” With technology changing so rapidly in today’s Web-based world, it’s difficult for government agencies to keep up. Outsourcing becomes the best solution, because they can leave the technological advances to them.

In addition, the public is growing accustomed to the convenience of Internet commerce in the private sector. They expect government agencies to provide similar services. However, government agencies don’t have the resources or the political mandate to acquire the technology to make this possible. Outsourcing becomes their only option.

The dynamic is different with outsourcing social services. Here, cost savings meld with quality improvements and access to highly skilled personnel. “There’s a mix of benefits,” says Moore.

A good example is the states’ welfare to work program. Agencies are outsourcing case management to a vendor. The government rewards the vendor by paying a fee every time a welfare recipient gets a job. The vendor has to accept the risk that some cases will be harder than others. “But there’s an incentive to produce the desired outcome,” Moore says.

Outsourcing complicated processes require more complex contracts. The welfare to work contract will be more detailed than the contract for repaving streets. Service level agreements (SLA) are more intricate, too. The state of Florida has outsourced its mental health care hospital, using SLAs. “How do you measure the quality of mental health care?” Moore asks rhetorically.

Learning To Shop

The changing face of government outsourcing has taught government agencies to become “more sophisticated shoppers.” Today they employ the same selection techniques as buyers in the commercial sector. “You can’t have knee jerk responses or canned approaches,” says Moore.

Previously, government agencies believed they were the only entities that could provide the services entrusted to their organizations. Then, as they began to outsource, the reality changed. “The idea that only government can manage a trash collection system is not true,” says Moore.

Now the thinking is government doesn’t have to actually provide the services but must make sure they are provided properly. “Their role has become a service purchaser on behalf of their communities,” reports Moore.

For example, many states are outsourcing adoptions and the placement of the state’s wards into foster homes. “There still have to be rules of the road. They are learning to steer, not row,” says the analyst. In the IT sector, government agencies are becoming astute customers of IT services so their staffers have the best tools available.

The evolution from provider to shopper has helped push cost savings to a lower rung on the totem pole. Now government agencies realize “they have to pay more for what they want.” Government buyers are analyzing a more sophisticated set of trade offs when they search for outsourcing vendors.

Politics Play A Part

Of course, the politics of government “never change,” says Moore. Outsourcing, in the end, is a political decision. Elected officials “get more excited about cost savings,” Moore notes. Improving quality, an amorphous benefit, can be harder to peddle to the public. “You may need a crisis situation to sell better quality,” the analyst says.

Lessons from the Outsourcing Primer:

  • Government agencies used to be solely concerned with cost when selecting an outsourcing supplier. Now other factors including access to personnel and technology have become just as important.
  • Government agencies are moving from supplying services to become sophisticated outsourcing shoppers.
  • The public’s growing acceptance of commercial Internet transactions is putting pressure on government agencies to provide comparable convenience.
  • SLAs and contracts are becoming more complex when measuring things like quality.


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