Managing High-Risk Outsourcing

Abstract

Outsourcing is a strategy used by local governments in an effort to provide high-quality public services at a low cost. The underlying idea is that a locality can take advantage of a vendor's considerable experience and economies of scale. The result will be comparable or better-quality services than provided by the locality itself, at a reduced cost to taxpayers, while still allowing the vendor to earn a reasonable profit.

During the past three decades, local governments in both the United States and abroad have undertaken such disparate outsourcing activities as animal control, legal services, fire protection, trash collection, health care, snow plowing, building maintenance, bill collection, data processing, street cleaning, street repair, and recycling. Unfortunately, outsourcing has not always achieved the dual goals of high quality and reduced cost. In part, this is because of poor vendor management by localities.

The way in which a locality must manage its vendors depends on the risk associated with the outsourced activity. The purpose of this article is to present two frameworks that can assist local governments in outsourcing. The first framework is designed to assess the nature of the risk of a potentially outsourced activity. The second, on which we place most of our emphasis, comprises techniques that can be used to manage the vendor of a high-risk outsourced activity.

In this regard, it is important to note that many communities tend to avoid high-risk outsourcing. Yet, just because an activity is high-risk is not a good reason to avoid it; rather, it must be managed differently from a low-risk outsourced activity if it is to achieve cost-effective results for the citizenry.

Keywords: public sector, outsourcing, management, risk, public services

JEL Classification: H70, H79, M11, M55