Making Transformational Outsourcing Work in the Public Sector

Transformational outsourcing can support government executives’ drive to effect change. For it to work, they must have the latitude to shape the tool to the purpose. For starters, that means knowing how to match their outsourcing approach to the situation at hand. Public-sector executives must then execute their outsourcing strategies masterfully.

Enable Transformational Initiatives with Performance-Oriented Management

Performance-oriented governments master the everyday management practices that enable effective transformational outsourcing. Outwardly focused, progressive governments institutionalize good outsourcing management through activity-based budgeting, clear goals and objectives, and visible progress reporting. They master techniques for dealing with the obstacles that arise, from tough labor unions and changing political administrations to reluctant finance departments.

Some governments—notably the UK, Australia, and New Zealand—have worked for the past decade to put these enabling management practices in place. The important components include overarching strategies and goals to guide their efforts and measures of success against which they can check their progress. At the execution level, they hire capable, practiced leaders with the authority to make sensible decisions to implement their plans and programs. They rely on sound financial systems that tell them how they’re doing. And they have responsive processes for sensing the pulse of their constituents, taking the measure of their competitors, and addressing the threats and opportunities. Finally, they institutionalize accountability for results to put some starch in the process. These governments:

• Query constituents to find out what they want from government. Ironically, many public-sector organizations operate without ever asking directly what the public believes its needs to be.

• Articulate a clear strategic mission and the measures of success that give it teeth. They favor outcome measures, and publish annual public reports that document performance against them. Among other things, for example, the UK department of work and pensions has committed to reduce child poverty by 50 percent in five years and to eradicate it in ten. New Zealand posts its government performance on the Web. In the United States, the Government Performance and Results Act (GPRA) takes a step in the right direction, and substantive performance reports are increasingly in evidence.

• Adopt accrual-based management accounting systems designed to foster accountability for outputs. Australia has put accrual budgeting in place for the whole of government. The state of Virginia developed COMPETE, a computer program that compares government and private-sector proposals on an apples-to-apples basis because state financial systems don’t provide comprehensive cost data.¹

• Solicit new ideas from potential vendors. Use flexible procurement processes like Australia’s Expression of Interest and the UK’s Information Memorandum to solicit new ideas from public- and private-sector organizations that are competing for the work. This process allows government executives to consider innovative vendor proposals before they craft an official tender. The government agency issues a brief description of the service it is looking for, then reviews the responding vendors’ capabilities and experience. Then and only then the government puts its request for tender together. As a result, government executives can create a tender that incorporates the potential for reengineered solutions.

• Seek executives who will achieve results. Attract experienced executives with contracts that pay them market rates with incentives for excellence, and put civil servants to work under their able leadership. As Wilson Bailey of the New Zealand court system explains, ‘‘When we’re looking for people, we ask what you have done. If you haven’t done anything, you’re not welcome in our organization.’’

Institutionalizing a performance-oriented management environment doesn’t, by itself, make outsourcing work. It does, however, set the stage by preparing executives to manage transformational outsourcing effectively if they should choose to use it.

Match the Outsourcing Approach to the Situation

Both public-sector types of transformational outsourcing—changing the value equation and making a market for services—can produce stunning results. But each also requires a different approach (see Exhibit 11.5). Getting the approach wrong can sap the benefits from any outsourcing relationship. Executives will want to tailor every aspect of the deal to the objective they are seeking: the length of the contract, the scope of the deal, the type of relationship you form with the vendor, and even the tendering process.

Exhibit 11.5: Match outsourcing approach to purpose.

To put a transformational outsourcing initiative on the right track, executives:

• Shape the outsourcing relationship to the objectives. Set the tone for the relationship you want from the beginning. Manage the tendering process to invite the level of innovation, partnering, and commitment you need.

• Select vendors that will work in the kind of initiative you envision. Public-sector executives who design long-term commitments will evaluate vendors, at least in part, by their willingness to collaborate. An NS&I executive emphasized: ‘‘The most important thing for us was to find a partner whose business was being driven in a strategic direction that would converge with ours.’’ An Australian public servant recalls a different experience: ‘‘We declined to be victims of [our vendor’s] global processes—most of which were designed to avoid risk for them. We spent lots of time and contractual leverage to ensure we had a strong say about how our processes would work. We do not consider them a good faith partner.’’

• Prepare for some disruption when political administrations change. When the public agenda shifts, new policy directions can create havoc with existing outsourcing relationships. For example, agencies and departments with long-term capability partnerships might be asked to about-face to make a market for services—violating collaborative relationships by soliciting multiple vendors and retendering more frequently. The resulting disruption won’t serve anyone well. To evaluate the last administration’s outsourcing strategies, review the objectives they graciously committed to writing. If these have changed signifi-cantly, revisit the outsourcing approach. Tracking outcome measures will also help. Together with the new policy makers, executives can decide whether the existing approach is paying off. Peter Bareau from NS&I recalls: ‘‘A Labor government took over in May 1997, when the outsourcing process had just started. We had to ask the new ministers whether they were happy with what was going on. Fortunately they were.’’

Masterful Execution

Effective outsourcing needs more than sound strategy; it needs masterful execution. Leaders around the world shared their views of the critical success factors with us. Dealing with the workforce issues loomed large, but they also had some advice for ongoing leadership of the effort (see Exhibit 11.6).

Exhibit 11.6: Critical success factors in effective outsourcing.

Workforce Transition

Outsourcing almost always changes the way people in the organization work—sometimes dramatically. Employees may be transferred from the government payroll to private-sector jobs; they may be redeployed to other jobs in government; or they may be laid off. As a result, they may feel threatened, confused, and betrayed, and emotions run high. The government executives we interviewed mentioned workforce opposition and labor union issues as the most important challenges they faced. They recommended:

• Get employees and unions involved early. You won’t eliminate employees’ feelings of uncertainty, but communicating early and often will help them navigate the process. Your communications agenda should explain the why, the when, and the how to employees and their union advocates. When you don’t know the answer, provide a date when you will, and only make promises you can keep.

• Create appealing transition packages. Some government agencies negotiate soft-landing packages with the vendor—for example, the U.S. Navy and Marine Corps required their intranet outsourcer to provide pay raises, bonuses, and three years’ guaranteed employment to ease the transition of government employees to the private sector. The UK Passport Agency converted casual contracts into permanent ones to create more security for workers. Mayor Goldsmith’s Indianapolis team crafted a range of solutions to meet individuals’ needs: those who qualified for pensions retired and were rehired; those who got a better pension plan from the vendor just moved; and those who would be disadvantaged by moving were redeployed in the government.

• Give workers choices to allow them a sense of control. Although it’s not always possible, giving workers options can ease the transition. When the UK’s Passport Agency outsourced data entry and printing, it first asked for volunteers. Robert Bowley, the agency’s director of public/private partnerships, and his team asked workers what kinds of choices they would find appealing. Bowley commented, ‘‘We wanted to take the heat out.’’

Ongoing Leadership

Workforce transition isn’t the only challenge that government executives face when they outsource. We don’t have many transformational outsourcing initiatives to learn from, but we can borrow management lessons from well-executed but less far-reaching public-sector outsourcing engagements. To overcome obstacles, executives:

• Get and keep key stakeholders on board. To effect lasting change, support is essential. You’ll want to identify the critical leverage points and find ways to bring them to your side. A UK government executive needed the UK Treasury Department to support a proposal to the Minister of Finance. She recounts, ‘‘They are very risk-averse. We worked through every objection tediously. It took time, but the challenge process made it a better deal.’’

• Manage expectations. Outsourcing makes implicit costs explicit and casual interfaces formal. The impact? Things that public servants used to get done by asking someone in the next cubicle now require a formal request or a manager’s approval. Clarifying the new work process before it happens will make the new disciplines less contentious. The IT director for Australia’s Department of Health and Aged Care launched a two-year change management program as part of the agency’s effort to outsource IT infrastructure.

• Pilot wholly new processes. Both you and your outsource vendor will stumble over implementing functions and processes that have never existed before. Conduct an explicit, limited-scope pilot to sort out the staffing, operating procedures, training, systems, and connections to the rest of the enterprise. When one U.S. federal executive set out to implement nationwide call centers, she started with two demonstration sites. She recounts: ‘‘In order to roll these centers out all over the nation, we needed to understand how they would work.’’

• Keep their hands dirty. Public-sector executives can never delegate their accountability for outsourced activities. That means staying intimately involved, whether the issue is operations or strategy. One Australian IT executive notes, ‘‘Our partner brought standard work plans with them, but we refused to be rushed. When it took time, we took the time to do it right.’’ New York State’s deputy commissioner for child support enforcement says, ‘‘Three people from my staff are on-site in our partner’s operation daily. We identify problems and suggest solutions—we monitor to make sure things are going well.’’