Developing Transparent, Accountable and High Performing Competition and Privatization Programs

Testimony to the Utah General Assembly Government Competition and Privatization Subcommittee

Mr. Chairman, and members of the committee, my name is Geoffrey Segal. I am the director of government reform policy at the Reason Foundation, a public policy research and education institute based in Los Angeles. Reason first began researching privatization in the late 1970s and is the publisher of the world's two longest running periodicals on privatization—the monthly Privatization Watch and our Annual Privatization Report which just published its 21st edition. Our experts have advised numerous presidents and state and local governments on how reform efforts can improve services and reduce costs.

Over the past decade, more and more governments have been inviting private firms to compete for contracts to provide services once restricted to public sources. This practice, known as privatization, contracting-out, and most recently competitive sourcing, has been widely embraced as an effective policy tool for driving change in organizations, improving performance and restraining costs. The key, of course, is ensuring that it is done correctly in a transparent, performance-based manner.

This trend is not confined to any particular region, or to governments dominated by either major political party. The reason for the widespread appeal of competitive sourcing is simple: it works.

According to a vast array of studies by the federal government, academic researchers and others, competitive sourcing historically has resulted in cost savings in the range of 5 to 50 percent.[1] Recently the federal government has experienced savings averaging 28 percent. Perhaps more impressive is that for every $1 the federal government has invested in competitive sourcing—preparing the competitions, managing them, and long-term oversight—it saves $31.

But cost savings aren't the only benefit. A review of state practices around the country found that a need for greater flexibility, access to skills not available in-house, and private sector innovation are all important factors in a state government's decision to outsource or institute competitive sourcing of services.[2] Indeed, initiatives that are considered best practices for government procurement and service contracting utilize 'best value" techniques, where, rather than purchase on low cost alone, governments choose the best mix of quality, cost, and other factors.

At its most basic level, competitive sourcing involves looking at everything government agencies do and determining whether private firms could do the same things more efficiently and effectively. I'm often asked what can government compete. Perhaps, its easier to identify what it cannot open up to competition, since virtually every service, function and activity has successfully been subjected to competition by a government somewhere at sometime. When former Florida Governor Jeb Bush was asked what he wouldn't privatize, he said, "…police functions, in general, would be the first thing to be careful about outsourcing or privatizing. This office. Offices of elected officials ... and major decision-making jobs that set policy would never be privatized." Its worth noting that Florida used competitive sourcing more than 100 times under Bush's watch and saved more than $741 million in actual dollars and prevented an estimated $1.4 billion in additional costs.

Former Indianapolis Mayor and now Harvard professor Stephen Goldsmith, used a different but widely accepted approach known as the yellow pages test; essentially saying that if a service can be found in the yellow pages, government ought to buy it rather than produce it. This mirrors a former New York Governor Mario Cuomo quote, "It is not a government's obligation to provide services, but to see that they are provided."

Another approach utilized by the state of Virginia and the federal government is to conduct a formal inventory of government activities to identify opportunities where competition could improve services and save taxpayer money.

Regardless, competition is about finding new ways of doing business and buying something different from what you already have. A sound process is essential to ensure a transparent, accountable, ethical, performance-based and competitive environment. A standard procedure ought to be developed with a dedicated team or 'unit' tasked with managing the process to ensure that the benefits of sharing lessons learned and best practices among agencies is not lost.

To date only the federal government and a handful of states (e.g., Florida and Virginia) have created commissions or administrative centers to address competitive sourcing. In each case, there is an establishment of an independent decision making body. Each organization created a uniform cost accounting model and recognized the importance of a standardized process for identifying and implementing competitive sourcing.

The key to success, in many ways, are the rules themselves. A successful process will ensure transparency, accountability, and the delivery of high performance services. By utilizing best practices and lessons learned from existing state and federal experience the likelihood of achieving those results is greatly enhanced.

I will close by making several recommendations that are based on more than 30 years of best practice.

    1. Seek stakeholder input and establish clear, standard lines of communication with the public to avoid a lack of lack of transparency. Agencies should work extensively with stakeholders to explain motivations and goals and how changes will affect them.
    2. Establish a core group of procurement officials to assist in procurement planning and decisions.
    3. Develop performance metrics and goals; include them into contracts and other oversight plans. Build these goals and benchmarks into the contract and tie performance of these goals to payment.
    4. Develop strong oversight, monitoring and assessment protocols before entering into a contract to guarantee compliance and performance. Monitoring should focus on quantifiable measures as much as possible—focus should be on achieving results, not on process. Simply put, effective monitoring pays for itself by improving the quality, transparency, and accountability of services.
    5. Develop a centralized 'unit' designed to manage initiatives and to establish best practices, utilize lessons learned and present a standard performance-based process. Further, this unit should identify enterprise-wide challenges and possible solutions.
    6. Focus on changing antiquated business processes. Competition fosters a new way of thinking and doing business. Don't simply try to do something for less; try to do something better. Contracts should be outcome and results orientated not process driven.
    7. Conduct an annual or biannual inventory of all functions and activities performed by state government, distinguishing between inherently government and commercial activities to create a transparent, searchable inventory of government activities that can be used for a range of management purposes from budgeting, to human resources planning, to identifying competitive sourcing opportunities.

These are some broad strokes to provide you with some guidance as you move forward with the development of your policies. While you can emulate others and their programs your policy must be designed to meet your unique needs and goals. Furthermore, while flexibility is important it must be stated that you cannot be flexible with the core principles of transparent, accountable and results or outcome based management.

As the think tank that has done the most research on privatization, competition and outsourcing, the Reason Foundation welcomes the opportunity to be of further assistance to this committee and body as a whole, as you learn more about these new approaches. Please feel free to call upon us.

Thank you again for this opportunity to be here today. I look forward to working with you and answering any questions you may have.

Geoffrey F. Segal is the director of government reform at Reason Foundation. An archive of Segal's work is available here and Reason's transportation research and commentary is here.

Endnotes

[1] Over 100 studies of cost savings from competitive sourcing are reviewed in John Hilke, Cost Savings from Privatization: A Compilation of Study Findings, Reason Foundation How-to Guide No.6, (Los Angeles: Reason Foundation, 1993), http://www.reason.org/htg06.pdf. For an overview of research on cost savings in federal competitive sourcing, see General Accounting Office, DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates, Washington, D.C.: GAO/NSIAD-00-107, Aug. 8, 2000; General Accounting Office DOD Competitive Sourcing: Some Progress but Continuing Challenges Remain in Meeting Program Goals, Washington, D.C.: GAO/NSIAD-00-106, Aug. 8, 2000; and Center for Naval Analysis, "Long-run Costs and Performance Effects of Competitive Sourcing," Washington, D.C., 2001 http://www.cna.org/research/studies/comsourc.html. For a classical text on this subject see E. S. Savas, Privatization and Public-Private Partnerships (Washington, DC: CQ Press, 2000).

[2] Keon Chi and Cindy Jasper, Private Practices: A Review of Privatization in State Government (Lexington, KY: Council of State Governments, 1998 and 2003).





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