Outsourcing Services

Public service outsourcing is growing in response to the need for solutions that can deliver cost savings. Many public service organizations are turning to private corporations to provide solutions for aged care services, waste management and the maintenance of local parks and gardens. These costs savings are delivered primarily from more flexible work practices and economies of scale. The following article examines some key factors which contribute to successful public service outsourcing solutions.

One of the key arguments for outsourcing public services is the resultant cost savings. Public sector operational frameworks are often bound by rigid wage and work practices that can lead to inefficient work practices. It is argued that private corporations do not face these constraints and can supply comparative services at a cheaper rate. A study undertaken by Borcherding et al in 1982, which analyzing 52 studies of efficiency in 19 different sectors across 5 OECD countries, concluded in 40 of the 52 cases that private supply chains were more efficient. With public service organizations faced with additional negotiating, enforcing and monitoring costs associated with contract maintenance, outsourcing public services permits leveraging private sector efficiency. With the ability to set performance targets and incentivize contracts that rewards efficient service delivery, public organizations can outsource routine services where the key elements of the contract can be precisely specified and transaction and monitoring costs are low.

Economies of scale also contribute to the preference of public organizations to outsource public services. Areas such as waste management and the provision of road maintenance services have several supporting case studies which indicate that private sector organizations can deliver considerable cost savings. This is particularly notable in areas where the private organization have established supply chain agreements and can purchase materials in significant quantity to create cost savings. The disposal of waste or road supply equipment are two primary examples of industries that benefit from large scale purchase agreements.

Prior to using private sector outsourcing companies, organizations need to consider the full extent of the perceived benefits. This is particularly important in situations where a change in service provision can create potential ancillary costs. Structural reform and the associated tender process can create unanticipated costs that can potentially negate any perceived cost savings. It is, therefore, important to create an outsourcing framework that involves a high degree of accountability and where the full extent of contract enforcement, delivery and monitoring are established upfront.

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