Testimony of Geoff Segal before:
The New York Senate Committee on Labor / competition
Over the past decade contracting has seen substantial and consistent growth among
governments at every level. Not only are they saving money, but contracting provides
access to expertise, flexibility, innovation, and speedy project delivery as well. Most
importantly, contracting introduces competition into otherwise monopolistic service
This example from the Office of Management and Budget illustrates the benefits of
competition. For years the Office of Management and Budget (OMB) has been critical of the
Government Printing Office (GPO) for high costs and lousy service. Last year OMB decided
competition was the only way to wake the GPO up, so they offered the job of printing the
fiscal 2004 budget to competitive bidding. After much complaint and righteous
grandstanding, the GPO turned in a bid that was almost 24 percent lower than its price
from the previous year. That was $100,000 a year that GPO could have saved taxpayers any
time it chose, but it never chose to do so until it was forced to compete.
Governments operate free from competitive forces and without a bottom line. Thus, program
structures and approaches often stagnate, and success is not always visible, and is hard
to replicate. Worse, since budgets are not linked to performance in a positive way, too
often poor performers get rewarded as budget increases follow failure. Applying
competition forces management to identify the true cost of doing business, and, with
efficiency as a goal, compels an agency to use performance measurement to track and
compare quality and value. At its root competition promotes innovation, efficiency, and
greater effectiveness. Competition done right drives down costs and ratchets up
What to Compete
There are many ways to identify where competition and contracting out might be usefully
applied. The simplest is to look at where it has succeeded before. But governments would
achieve more sustainable results by combining an analysis of where privatization has been
successful with another toolan inventory of commercial activities.
Applying this thinking, in 1998, Congress passed the Federal Activities Inventory Reform
(FAIR) Act. Its purpose was to identify which activities within the federal government
were inherently governmental, i.e., it is a job only government can do or it is commercial
in nature. A commercial activity; is a service or good that can normally be obtained from
private enterprise. In the federal law, agencies perform inventories annually and identify
both commercial and inherently governmental positions. With this information agencies can
identify services that can be competed or privatized. The FAIR Act requires each federal
agency to submit a list of activities to the Office of Management and Budget. That list
breaks down the
federal workforce into two broad categories: inherently governmental i.e., jobs that only
government does or should do and commercial i.e., jobs that could be provided by the
private sector. These are jobs the federal government can buy rather than
produceincluding maintenance, accounting, and writing software.
To date, only one state has a similar processVirginia. Under the direction of the
Commonwealth Competition Council (CCC), a survey of state agencies was conducted in 1999.
Unfortunately, the CCC has not conducted a follow-up study. However, they surveyed all
state agencies and institutions to determine what commercial activities were being
conducted by state personnel with the goal that agencies would use the information to seek
ways to evaluate the costs, benefits, and possible consequences of alternative strategies
to determine the best way to accomplish their respective goals, objectives, and mission.
Even though the survey was only completed one time, the numbers are staggering. The CCC
identified 205 commercial activities that were being
performed by nearly 38,000 state employees! If states and municipalities adopted a similar
mechanism, competition opportunities would be more transparent. Additionally, agencies
would be equipped with necessary information to focus on their core functions of
inherently governmental services while partnering with the private sector for commercial
activities. At the local level, both the city and county of San Diego have also
implemented similar procedures.
Equipped with this information, agencies can determine which activities are linked
directly to agency mission or goals and which are second-tier or support functions.
Applying competition to non-core activities frees up valuable resources for the agency to
complete its mission and provide the greatest value to taxpayers.
How to Implement
Performance-based contracts have emerged as an important tool, providing government
managers with better control over contractors and greater assurances of accountability.
Unfortunately, typical contracts emphasize inputs: procedures, processes, the wages to be
paid, amount or type of equipment, or time and labor used. But forcing contractors to
emulate in-house procedures eliminates many of the reasons to privatize. Such
micromanaging limits opportunities for the contractor to innovate, be flexible, or offer
enhanced or different types of service. More and more, governments are using performance-
based contractsan outcome- and results-based approach to contracting.
A performance contract is one that focuses on the outputs, quality and outcomes of service
provision and may tie at least a portion of a contractor's payment as well as any contract
extension or renewal to their achievement.
Performance contracts clearly spell out what is expected of the contractor, but the manner
in which the work is to be performed is left to the contractor's discretion.
Performance-based contracts promote the broad range of privatization goals that go beyond
simple cost savings. They allow governments to purchase results, not just process,
rewarding the private firm only if specified quality and performance goals are met. With
performance-based contracting, governments are purchasing something fundamentally
different from in-house services.
Performance-based contracting addresses the problems and challenges that cause opposition
to privatization. It requires agencies to set clear performance goals for privatization
contracts and holds them accountable through their budgets for meeting them.
Using performance-based contracts can be challenging, as is any management change based on
performance and accountability. Officials must choose services suitable to
performance-based contracts and devise ways to tie payment to performance and performance
to the results the public expects of the agency. Performance contracting is not a magic
wandit can be done well or poorly, and hence come out well or poorly. The key to
using performance-based contracting to serve the public good is the practical, not
political, matter of understanding what has worked and what has notdoing the
Along with performance contracting comes a greater need to monitor contractor performance.
As more agencies rely on private companies to deliver public services, monitoring and
assessing these outside partnerships become vital to achieving the government's goals.
While monitoring and measurement systems are becoming more refined, state agencies need to
continuously improve purchasing and oversight of service delivery. Effective monitoring
pays for itself by improving the quality, transparency, and accountability of services.
According to the Government Contracting Institute, the value of federal, state, and local
government contracts to private firms is up 65 percent since 1996, and reached a total of
over $400 billion in 2001. The Government Performance Project at Syracuse University
reported that at the end of 2000 contracting consumed on average about 19 percent of state
A 1998 survey by the Council of State Governments (CSG) found that 60 percent of state
agencies had expanded their use of privatization in the past five years, and 55 percent
expect to expand their use of privatization further in the following five years. CSG asked
state agencies about past and future
privatization and the use of privatization. Though not all state agencies responded, the
extent of privatization and the anticipation of further
privatization in the future show that it is a policy tool that is here to stay. That is so
because when implemented well, privatization works.
Anecdotal evidence suggests that contracting continues to grow fastest at the local level.
Difficulties in reporting make it nearly impossible to
present overall percentages or dollar values of contracting in municipalities. However,
there are some service areas for which good data exist. For example, water and wastewater
systems owned by local governments, where outsourcing of services rose by 13 percent in
2001. Additionally, a survey of the 200 largest cities found that, although fire
departments continue to dominate as first responders, cities are growing slightly
friendlier to private providers for medical transportation. In 2001, 37 percent of
the cities surveyed turned to private for-profit agencies, up 2.5 percent from the
previous year. The percentage of private not-for-profit providers held steady at 5
Some of the best data on the benefits of competition in government come from the federal
government. From 1995 through 2000, the Department of Defense completed over 550
competitions, which resulted in an average savings of 34 percentthis is regardless
of who wins the competition. The competitions resulted in estimated annual savings of
$1.46 billion (FY 1996 dollars).
Largely speaking, there isn't a service that is provided by government that hasn't been
subjected to competition or contracted out in some fashion. Cataloging each of these
services and the results could be a hearing unto itself. With that said, however, the
federal government assumes savings on
average of 30 percent when competition is applied.