Six Myths of Competitive Sourcing

he private sector increasingly has found that outsourcing-through competitive processes-has resulted in both improved performance and lower costs. Yet a shift to such competitive sourcing in the federal government has met fierce resistance from the workforce, unions and elected representatives. Critics base their opposition on six myths:

• Performance will deteriorate because industry would focus on profits, not public needs.
• Costs would be higher because government employees are paid less than those in industry, and the government does not charge fees for its services as businesses do.
• Promised savings from competitions would not materialize.
• Small businesses would be hurt because prior small contracts would become part of larger overall competitions.
• Many government employees would be laid off if agencies lost competitions to the private sector; or, even if they won, as a result of streamlining their operations.
• Managers would lose significant control if much of their work were contracted out.

BETTER PERFORMANCE

Much of government's early experience with the various forms of competition came at the local level. Results of a 1995 survey of 66 of the largest U.S. cities by Robert J. Dilger, et al., were published in the January 1997 issue of Public Administration Review. The survey weighed the impact of shifting work from a government monopoly to a competitive environment-with a public or private winner. Eighty-two percent of the cities reported they were satisfied or very satisfied with the resulting performance, and the remaining 18 percent were neutral. None were dissatisfied. The report found a 25 percent improvement in service on average. The shift to a competitive environment not only improved performance, but also resulted in savings of up to 60 percent.

Similar results have been achieved at the federal level, with much of the early data from the Defense Department. When the Navy allowed sailors to choose their own household moving companies, a selection previously made by the central transportation office, customer satisfaction increased from 23 percent to 95 percent. Damage claims dropped from one in four moves to one in 12. In another example, Defense put up for competition its maintenance and logistics support for an aircraft auxiliary power unit. Previously, that work fell exclusively to government employees. The resulting public-private partnership lowered costs and increased the reliability of the units by a factor of more than 10. Flight hours between incidences of unscheduled maintenance went up 300 percent for the P-3 aircraft and 45 percent for the F/A-18 aircraft.

LOWER COSTS

In 1996, the Center for Naval Analysis studied 2,138 A-76 competitions at the Defense Department between 1978 and 1994. The average cost savings was projected to be 31 percent. A General Accounting Office analysis (GAO-01-20, December 2000) of 286 Defense competitions from 1995 to 1999 noted that 40 percent were won by the private sector and 60 percent by the government, with a reported average competition cost savings of 39 percent. GAO did not have precise figures on the savings, but, the report said, "the savings from the [competitions] are substantial and sustained over time." Additionally, a report by the Defense Department Commercial Activities Management Information System (CAMIS) about 314 public/private competitions between fiscal 1997 and 2001 showed that the average staff size was reduced by 35 percent, even though only 40 percent of these competitions were won by the private sector. When agencies are forced to compete, they can do the same work just as well or better than they did before, but with significantly fewer people-frequently with 20 percent to 40 percent fewer. Similar results have been found at the state and local levels, as well as in international cases.

SAVINGS OVER TIME

Studies of public/private competition indicate that savings are realized as long as the potential for competition exists. In 2001, the Center for Naval Analysis reported on 16 competitions for which the average expected savings was 35 percent. The actual savings was 24 percent, but that was due to increases in contract scope and quantity. When those contract changes were taken out of the calculations, the average savings was 34 percent-meaning the government accomplished significantly more work for significantly lower costs. In a 2000 study by the think tank RAND of six competitions, the expected savings ranged from 41 percent to 59 percent, when the contractor won, and ranged from 34 percent to 59 percent for government wins. "The contractors' savings were sustained over time," the study found, but no cost data was tracked for the government wins. Savings in the government are difficult to validate because agencies lack solid overall cost data. But staff reductions alone confirm the cost-effectiveness of competition.

SMALL FIRMS BENEFIT

Numerous studies have shown that competition can boost a program's efficiency through reengineering. Some fear those improvements come at the expense of the small businesses whose interests are built into many government procurement actions. But competition can significantly benefit smaller businesses. The government's advertising of competitions on the Internet has increased small firms' participation in procurement activities. From 1995 through 2001, the Defense Department conducted 784 public-private competitions, and 79 percent of the contracts were awarded to small businesses. Many of the large outsourced contracts included requirements for a significant share of the work to go to small businesses as subcontracts. Two of the largest outsourcing awards at DoD-multibillion-dollar contracts for the Navy/Marine Corps Intranet and the National Security Agency Intranet-included mandates that the winner set aside 35 percent of the business for small firms. This requirement on large contracts yields a much higher dollar volume for subcontractors than smaller direct contract awards do.

FEW LAYOFFS, MORE CONTROL

Studies indicate a labor savings of 20 percent to 40 percent when competition is introduced-even when the government wins. Yet, surprisingly, relatively few government employees are laid off as a result. When a contractor replaces a military service member, the service member moves into a combat position. Civilian employees have numerous other options. In a 2001 GAO study (GAO-01-388) of three Defense competitions, only 8 percent of the 1,000 employees were laid off as a result of job cuts. Twenty-six percent were transferred to other positions, and 65 percent voluntarily retired or took buyouts. Of the people who left voluntarily, 26 percent took jobs with the winning contractors. In a 1997 study by the Center for Naval Analysis, competitions at large depot maintenance facilities had promised reductions of 40 percent of the employees. But after retirements, transfers and voluntary separations of employees who went to work at the winning contractors, just 3.4 percent of the workers were laid off.

An Army competition in 1999 was designed to replace an in-house group of 400 workers who were maintaining an old logistics information system at computer software centers in St. Louis and Chambersburg, Pa. The Army decided to competitively outsource this work, but to require the winning contractor to hire all the federal workers for at least one year and train them in a modern software language. The workers would maintain the old system during the transition and, with their additional training, would become much more valuable to the contractor. The Army gained a more efficient logistics information system in the process. Manpower considerations can be a major part of a competition. The negative impact on employees can be minimized. Similar results have been found in competitions at the state and local levels.

Many government managers mistakenly believe they have more control when employees report directly to them, rather than through a contractor. In reality, these managers have little ability to hire, reward or fire their own workers. Also, government organizations lack the ability to measure performance in terms of overall cost. In a competitive market, federal managers can manage and monitor costs, based on the performance measures required in a contract.

BREAKING THE MOLD

The key to improving government effectiveness is shifting from a monopoly to a competitive environment, or at least introducing the serious possibility of competition. The issue is not government or private sector performance, but rather the incentives for higher performance at lower costs that come from competition. And, when competition is introduced, it must focus on best value, rather than simply low cost. Otherwise the cost reduction will come at the expense of performance. Once a service provider is selected, quantitative metrics for both performance and costs must be established, whether the winner is the government or a contractor. These performance measures must be directly related to service goals and monitored frequently throughout the program's life span.

The results of competition have been so positive that the Bush administration has pushed agencies to conduct more and more. But the process itself must be improved. And, officials who run the competitions, as well as those who subsequently manage the public or private sector winners need more guidance, not myths. The winning result will be better government services and lower costs.