Outsourcing in the Public Sector Is Particularly Challenging

These results look very appealing, but many government executives and policy-makers are reluctant even to consider transformational outsourcing. Why? The public-sector environment makes it particularly challenging to choose this option and even more challenging to manage it effectively. Government executives are often buffeted by a set of powerful influences and political forces that make it inordinately difficult for them to succeed (see Exhibit 11.3).

Exhibit 11.3: Constraining forces funnel executives toward suboptimal outsourcing decisions.

We have seen how important it is to establish a clear purpose and business case for the transformational initiative. But most government organizations lack good, outcome-based measures of success. Profits and return on investment play this role in private-sector, for-profit companies. What would the corresponding measure be for a court system or child welfare agency? Executives could aim to reduce crime or child poverty, but they certainly do not influence all the factors that contribute to these results.

Even if goals are rock-solid, some governments’ accounting systems don’t give executives a way to assess performance against them. Australia, the UK, and New Zealand have implemented accrual accounting practices that support their ability to match investments with the returns they generate. The U.S. and other governments lag behind in this arena. Their accounting systems measure cash outflow rather than offering management-type accounting reports that take a more comprehensive view, such as total cost of ownership or multiyear project benefits.

Cost is one metric that can be tracked—although with some diffi-culty—but public-sector organizations are structured to take such a short- term view of savings that this measure can do as much harm as good. In Australia’s ill-fated cluster program, outsourcing was mandated for groups of government agencies, but these groups were not allowed to choose a provider unless they were promised a 15 percent year-on-year cost improvement. They could not consider other benefits unless the proposal reached this threshold.

Shifting from a short-term focus on cost to a search for value can pluck executives out of the frying pan, but drop them unceremoniously into the fire. Higher-value outsourcing initiatives often involve more complexity and flexibility and require deeper skills to manage outsourcing relationships effectively (see Exhibit 11.4).

Exhibit 11.4: Increasing scope and complexity make outsourcing more challenging.

As new administrations are elected, leaders swing the public agenda from bigger, more capable government to smaller, less intrusive government and back again. With long-term objectives subject to sudden change, agency executives are reluctant to enter into long-term agreements that commit them to one policy agenda or another.

Some governments’ checks-and-balances political structures under- mine the strong leadership roles that transformational outsourcing requires. In the U.S. federal government and some so-called weak-governor states, any substantial initiative is immediately subject to partisan political infighting. Leaders must be willing to spend their time and limited political capital on outsourcing in order to push it over these structural hurdles just to strike a deal. And leading the ongoing relationship with outsourcing providers to ensure continued progress requires sustained political supervision.

Procurement procedures that were designed to ensure fair, transparent processes can be cumbersome, time-consuming, and unwieldy as a result. A U.S. CIO remarks: ‘‘The [U.S.] government has not had a great track record of adopting best commercial practices because laws and regulations get in the way.’’ In the United States, for example, some regulations require work to be conducted in a particular way rather than allowing the outsourcing provider to operate most efficiently. And conducting the competitive process to evaluate whether jobs should remain in-house or be outsourced must be completed in a specified time frame. If managers do not complete it by the deadline, they must start all over again, from the beginning. An executive from Canada explains that his country’s procurement process requires him to consider all bidders, even those that are clearly incapable of performing the work. Despite this national government’s lead in using outsourcing progressively,^[4] a UK executive calls their procedures ‘‘tactical at best.’’

Some governments’ incentive structures inhibit risk-taking. While the outsourcing track record varies from country to country, the price of failure is uniformly higher than the reward for success. For example, after the UK outsourced its railway track infrastructure, a series of train wrecks pointed out serious service-quality issues, and the government subsequently declared the outsource supplier bankrupt. Even attempting to make big strides can elicit strong counterforces. A U.S. defense executive described a sorely needed initiative to regionalize military operations to drive out expensive duplicative functions: ‘‘Budget pressures drove consolidation; they just couldn’t afford business as usual. The regional base commander was a champion for change. She energized the workforce, and they were making wonderful progress consolidating 300 physical locations down to a handful. As these things often happen, she got reassigned, and the new person didn’t have the same fire in his belly. When the backsliding began, who got tarred with the failure? The first base commander. No wonder no one wants to take on projects like this.’’

Yet short political cycles make it essential to move quickly. One U.S. state executive explains: ‘‘Why do we see big successes in the UK and New Zealand? They have a parliamentary government with no adversarial relations between the executive and legislative branches. Today our [U.S.] legislators give money to the executive branch doled out in little chunks with micromanagement.’’

Finally, workforce issues loom large. Many government workers belong to unions. One U.S. executive states: ‘‘If it’s a new outsourcing contract, the unions will bring everything in their power to bear against you.’’ An executive from the UK continues: ‘‘It’s like the poacher and the game- keeper. The people being transferred will never buy in because they feel dumped on the scrap heap.’’

Under pressure to ‘‘do more with less,’’ governments search for ways to provide needed services, cut costs, and find new sources of investment capital for infrastructure. Outsourcing looks like an answer, so leaders issue mandates designed to achieve measurable results before their political time runs out—that is, urgently. Unfortunately, this short-term forcing function skews outsourcing initiatives toward the lower end of the value spectrum. Specification-driven procurement processes favor narrow tenders that often don’t invite innovative solutions. And a strong emphasis on visible cost savings over value attracts vendors who bid low, but intend to make up their margins on inevitable out-of-scope work. As a result, executives often end up paying more than they expect as unanticipated work creeps in and getting too little of the service they really need in a dynamic environment. In this context, it’s not surprising that public-sector outsourcing has mixed results, which make it even less appealing.

Conventional Wisdom Imposes Blinders

The conventional wisdom about what and how to outsource appears to be designed for a stable, well-defined environment. But it is the wrong recipe for a world in which technologies, priorities, finances, and citizens’ demands are more volatile. One government executive snorts: ‘‘The model doesn’t work. It never worked.’’ Conventional outsourcing principles advise executives to outsource noninherently governmental jobs and non- core processes so they can focus attention on more important matters. But clearly identifying work by these categories isn’t so easy. The answer depends on an organization’s strategy, and it can change quickly. In the United States prior to September 11, 2001, for example, airport security was a noncore, nongovernmental activity. President Bush would argue it still is. According to Congress, however, it isn’t, so U.S. airport security workers have been federalized. Robert Bowley, director of the UK’s Passport Agency, states: ‘‘We still talk about the core/noncore distinction but the reality is more fluid and strategic.’’

The bit about executive focus isn’t solid, either. Executives report that they spend as much time and effort managing outsource vendors as they did when the operation was in their own shop. One manager who has carefully measured this cost claims it amounts to 8 to 10 percent of the contract value on average. Sixty-two percent of the public-sector executives that were interviewed count continuing, concerted executive attention to leading the relationship throughout the contract as a critical success factor for outsourcing.

Conventional wisdom about what to outsource isn’t helpful; additionally, conventional wisdom about how to outsource leads executives astray. The outsourcing textbook calls for avidly negotiated, tightly specified contracts that penalize vendors for failing to meet stipulated service levels. But airtight contracts don’t offer the flexibility executives need to adjust to changing conditions. These contracts also set up an adversarial relationship that inhibits joint problem solving. In the words of one executive: ‘‘If you have to go to the contract to manage the relationship, you have already failed.’’ Through agency consolidation, for example, a UK government organization inherited a problematic outsourcing deal. The executive in charge explains: ‘‘The outsourcing provider was required to rewrite, then run, an application, and they were losing money on the deal. When we operate an agreement and the supplier is taking a huge loss, we can’t just walk away from responsibility for that. It’s bound to affect their service, and we’ll suffer the consequences. We altered the terms of the deal so the supplier could earn a fair return.’’

Leaders Embrace Transformation

Despite the challenges, leading government executives around the world are using outsourcing to achieve dramatic improvements in their agencies, their governments, and their public/private value models. They create markets, collaborative partnerships, and equity commitments to nurture a thriving public/private value network that improves government, serves citizens, and fosters healthy enterprise. The results range from massively more effective organizations to stunning improvements in economic value. Executives who have structured transformational outsourcing projects generally follow one of two paths: They make a market for services or they make lasting commitments to transform the value equation.

^[4]Jane Linder and Thomas Healy, ‘‘Global Government Outsourcing: Pathways to Value,’’ Accenture Government Executive Series report, May 2003.