Outsourcing in Government Is Growing

Outsourcing in the public sector is growing (see Exhibit 11.1 for more information on how outsourcing is defined in the public sector). Solid numbers are hard to come by—at least in part because executives in different countries don’t even share the same definition of the term—but the trend is unmistakable. By the end of the 1990s, governments around the world had transferred more than $1 trillion in assets to the private sector.^[1] From this base, outsourcing in the U.S. government is expected to double over the next five years.^[2] A recent International Data Corporation (IDC) report shows outsourcing spending in both U.S. federal and state and local governments growing at faster rates through 2005 than in any other industry segment—15.7 and 14.7 percent per year, respectively. The projected growth in government outsourcing in Europe is even higher—17 percent per year through 2004.^[3]

Exhibit 11.1: What do we mean by outsourcing in the public sector?

What makes up this boom? Some government somewhere has outsourced just about every public function you can think of, from running schools to collecting taxes (see Exhibit 11.2). This chapter focuses on the administrative and information-technology functions that government organizations require to operate and fulfill their public missions.

Exhibit 11.2: Governments have outsourced a wide variety of functions and processes

Executives expect outsourcing to improve both the cost and the performance of their organizations and to create distinctly better value for taxpayers. And they have some justification for these high hopes. NS&I’s results stand out as excellent value for money, according to the National Audit Office of the UK. And that’s not the only example of successful transformational outsourcing in the public sector. In the early 1990s, Mayor Goldsmith turned around Indianapolis, using outsourcing to cut costs in some arenas in order to improve services in others. The U.S. military’s Defense Logistics Agency questioned its ability to survive as an organization before it reengineered its supply chain through outsourcing.

^[1]Yochi Dreazen and Andrew Caffrey, ‘‘Now, Public Works Seem Too Precious for the Free Market,’’ The Wall Street Journal, November 19, 2001, p. 1, A10.

^[2]Cynthia Doyle, ‘‘Worldwide Outsourcing Market Forecast and Analysis, 2000–2005,’’ International Data Corporation, May 2001.

^[3]Nick Wakeman, ‘‘Foreign Nations Outpace U.S. in Outsourcing,’’ Washington Technology, August 28, 2000.