Although governments are monopolies, the services they offer are now widely available on the open market. Private schools, security companies, prisons, judges and social services agencies are now on offer to local government agencies. As a result, some cities are attempting to achieve a higher level of service and efficiency by outsourcing key services to private contractors.

"There is an entire spectrum of options from pure public at one end to pure private at the other with a mix in between," said Brook Doty, optimization program manager of San Diego. "We see all of them as viable and valuable and use all as appropriate."

Although costs are often a primary driver, there are many reasons local agencies choose to outsource.

"Unfortunately, cost savings often dominate the debate overshadowing the many other just as important motivations, such as improved quality and performance, increased accountability, greater flexibility and better risk management," said Geoffrey Segal, director of privatization and government reform policy at the Reason Public Policy Institute in Los Angeles. "The bottom-line is that governments can design outsourcings to meet their specific needs and their specific goals."

Philadelphia Story

Philadelphia has been outsourcing in one form or another for a decade. The city has been in the news this year as 70 of its worst-performing schools are slated for privatization as part of Gov. Mark Schweiker's plan to improve the quality of education.

A decade ago, Philadelphia began utilizing outsourcing to overcome a huge deficit, declining revenues and limited ability to obtain financing. As a temporary fix, the Pennsylvania Intergovernmental Cooperation Authority stepped in with a bond. The city renegotiated its labor contracts and boosted sales tax by 1 percent. This relieved the immediate predicament, but the city needed to establish a longer-term solution that would prevent the problem from recurring.

To address the underlying causes of insolvency, Mayor Ed Rendell established the Competitive Contracting Program (CCP) in 1992. The initial targets included more than 30 city services whose inefficiencies and low standards were well known. The next step was to see whether a private company could do a better job for less.

After compiling a performance standard and economic analysis, the Competitive Contracting Committee met with union representatives and department managers to see what they could do to compete with a private contractor. In the meetings, ideas surfaced of ways to cut costs by 10 percent to 20 percent while boosting service levels.

Linda Morrison, a policy analyst who established and ran the CCP, said she learned that the worst inefficiencies were caused, not by incompetence, but by a system that lacked incentives for employees and managers to work to improve their area.

The threat of having the activity outsourced was one such incentive. When the Water Department's sludge treatment plant came up for review, the city had already determined that a private contractor could run it for less than what the city was currently paying. The managers and union then came up with ways to cut costs by 34 percent, saving the city more than $8 million.

As a result of its proposal, the Water Department kept the wastewater management in-house, but most of the city services initially targeted for competitive contracting in Philadelphia did end up being outsourced. Overall, the city has saved hundreds of millions of dollars over the past nine years as a result of the program.

Philadelphia has come a long way from the financial emergency that initially prompted it to change the way it conducted its business. By eliminating waste, the city has now had nine straight years of positive fund balance while simultaneously cutting income taxes. And although the Competitive Contracting Program itself is no longer in operation, Assistant Budget Director Sean McNeeley said many of the actions started then are still ongoing, though under different names.

Drew Robb  |  Contributing Writer