To outsource or not to outsource? It all depends...

As governments increasingly come under fiscal stress, many leap at the opportunity to cut costs by outsourcing services. The current flurry of activity around outsourcing, gaining much attention in the UK, and now reappeared as the strategy du jour for state governments seeking to reduce spending, takes us back to the future in some sense.

The old debates re-emerge. Governments and advocates on the political right sing the praises of outsourcing as a sure thing when it comes to cutting costs; and those on the left shout about the benefits of government provision and downsides of leaving public service provision to the market. Both, of course, are misguided in their approach, yet again and again we return to this fairly blunt exchange of views.

It all depends

In recent work with John Alford, we argue that it’s time to rethink public service delivery entirely and take a much more nuanced approach to this tool, one of many, that government has in its armoury.

Arguing the case that public services should always be provided by government is as absurd as arguing that they should never be.

Sadly nothing is so simple. In our book, Rethinking Public Service Delivery, Alford and I make the argument that when it comes to outsourcing “it all depends”.

On the one hand this might seem an unhelpful, possibly ambiguous, foray into the outsourcing debate; but it does offers insight into the complexities of outsourcing that is missing in the debate now, just as it was the last time governments fixated on this as “the” answer.

Three questions to ask

Our argument is that, to date, views on the costs and benefits of outsourcing have been far too narrow. We point to three major questions that should be answered in any outsourcing decision.

The first question gets plenty of attention: what are the service benefits and costs, or the “value for money” part of the “it all depends” story? Basically we make some assessment of whether an external party can do something better and/or, cheaper and this covers off most of the service benefits and costs we care about.

The second question gets some attention, sometimes, but not often enough: what are the relationship costs or the “making it happen” part of the story? Even if some other party can potentially do something better or cheaper for us, we have to expend quite a lot of effort and resources in actually making that happen. We have to define the services, we need to run tendering processes, often, to select a provider, we have to monitor that they are doing what they said they would, and so on.

None of these activities is cost free for the parties, but these rarely get discussed in any public debate about whether or not we should outsource public services. We need only to look at the current debacle in the UK on the management, or not, of the rail franchises to see the potential effects of not being able to manage these processes.

The third question, critical as it is, barely rates a mention until there is a scandal. This is the question of the strategic costs which represent the “keeping it sustainable” part of our “it all depends” story.

How might outsourcing enable government to take a more strategic rather than operation role (the classic steering rather than rowing narrative)? How is risk allocated (or not) between parties? What is the reputation building or destroying potential of outsourcing? What about he loss of core competences, and the handing over of legal force to other parties?

Again, such issues emerge centre stage during scandals or crises, but rarely get an airing in the public debates about outsourcing.

A recent report from the Government Accountability Office in the US showed how the Federal Protective Service, housed in the Department of Homeland Security, has basically lost control of assessing risks to federal buildings because it has handed this over to private contractors providing security services.

Closer to home, the Australian Public Service has, for some time, lamented the loss of the ability to know what it needed to buy in terms of IT because it had handed over system architecture expertise to outside providers. The strategic costs of the application of legal force, via contractors in private prisons or detention centres, have created political and moral ramifications for governments in Australia

Learning from the past

While the idea that “it all depends” might on the face of it seem simplistic, it does, in fact, represent a much more sophisticated way of considering the outsourcing decision. It allows governments and public manager to be more discerning in when, to whom, and how to externalise public services.

Assuming that outsourcing will automatically produce cost savings is blind to the experiences of the past, as is the notion that it will lead to the collapse of public services.

We know that there are major challenges in outsourcing but it does us no favours to repeat the mistakes of the past, or to be blindly re-entering the world of outsourcing without a serious reappraisal of what we have learned over the past 20 to 30 years of success and failure.

Janine O'Flynn has received research funding from the Australian Research Council and the Australian Public Service Commission.