The Business of Government

Cities are looking to the corporate world for ways to achieve higher levels of service and efficiency.

by / September 5, 2002
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.

Optimizing Processes
Like Philadelphia, San Diego compared its activities to the private sector, but preferred to keep the work in-house. The city's foray into this area began in 1993 when then-Mayor Susan Golding enlisted local business people to propose means to improve city efficiency.

A program initiated by the city manager, who solicited input from city employees, matched the citizen task force. With input from the two groups, the city embarked on a wide-ranging series of changes that have won recognition over the past two years from the Government Finance Officers Association and the International City and County Management Association.

One of these developments was the creation of the Optimization Program. The five-person office acts as an internal consulting firm for the city. It concentrates on three areas: public contract operation, information technology integration and best practice integration.
San Diego does outsource some of its operations.

For example, it spun off its IT department forming the non-profit San Diego Data Processing Corporation (SDDPC). In addition to serving the city's needs the SDDPC provides computing services to cities, counties, state agencies and utilities. Its clients are primarily in Southern California, but its reach also extends as far as Chester County, Pa.

San Diego wants to achieve the same efficiency level as private enterprise, and SDDPC has been successful, but outsourcing has become the exception rather than the rule.

"We are finding that when we give our public employees tools to be effective they can compete effectively with private-sector vendors," said Doty. "There are still opportunities for us to do competitive outsourcing, but we are being much more selective."

The city uses a process called Bid to Goal to help agencies achieve private-sector efficiency levels. It typically hires an outside consultant to help with the technical aspects of assessing an agency's performance and comparing that to what is available commercially. Then the contractor puts together a Private Market Proposal stating what the city would pay an outside vendor to perform the service at the desired quality level.

But rather than putting out an RFP, Doty's staff puts together an Optimization Plan containing the best practices needed to reach that level of performance. This is then assembled as a contract between the city and the employees where they agree to provide a certain level of service for a certain budget, just as if they were an outside firm.

In addition, the city recruits volunteers from the business community to conduct zero-based management reviews (ZBMR). The volunteers go into the departments, do assessments of the operation and make recommendations of ways to bring private-sector expertise to the public sector. The goal is to have every department reviewed at least once every five years. Once a review is completed, the department has 60 days to create a plan for implementing the recommendations. The Optimization Program staff work with the departments in developing performance measurements and tracking the progress made.

"Since 1995, 25 ZBMR assessments have been completed with the savings approaching $100 million," said Doty. "As the work continues we estimate we will see another $50 million."

Clearly Defined Goals
Whether the service is best performed by city staff or contracted out, certain principles apply. When outsourcing, Segal cautions against micromanaging the contractor. The contract needs to make clear the desired outcome but must leave it up to the contractor to determine the best way to achieve the outcome.

"Governments need to avoid 'bureaucratic creep,' where public officials spell out exactly what and how the contractor is to perform," said Segal. "If they fall victim to this, they often repeat in-house processes and that undermines the whole point of outsourcing."

He also advises government officials to clearly establish performance requirements, with penalties and rewards that establish a clear financial incentive for the contractor to produce more than the contract minimum.

When contracting with one's own employees, Doty emphasizes bringing labor, management, front-line employees and citizens into the process right from the beginning.

"None of this happens unless all the stakeholders are involved and they all have a voice," he explained.

But once everyone is operating as a team, the benefits extend far beyond the individual project and permeate the entire work environment.

"There has been a major impact on the culture of the city, in the way people think about process improvement and improving efficiency," Doty said. "We reap the benefits of that culture change a thousand different ways each day."
Drew Robb Contributing Writer