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It is well publicized that state governments throughout the country, as well as local city governments, are facing significant budgetary pressures. Personnel costs represent a significant part of the expense, so many are looking to privatize government services and replace government workers with contracted employees in the hope that they can perform the same tasks for less. Let's take a look at the budget issues from each side of the table.
From a government’s perspective, there are both benefits and disadvantages to outsourcing functions to vendors.The following are among the benefits:
- Cost savings
- Private sector proficiencies as well as expertise
- Red tape reduction and less bureaucracy
Some notable disadvantages:
- Conflict of interest if the contractor is a profit-seeking entity looking to cut corners
- Decreased control
- Less oversight
- Citizen dissatisfaction with service levels
- Public sector union opposition
- Imprecise performance measurements
From a vendor’s perspective, there are also benefits and disadvantages for government outsourcing. The vendor's benefits include:
- Potential for growth and consistent work opportunities
- Gaining a better understanding of how government agencies should work
On the other hand, vendors may face the following possible problems:
- Lack of flexibility
- Very detailed rules that need to be followed, combined with lack of communication
So what makes for successful outsourcing?
Three Tips for Successful Outsourcing
Before outsourcing a government function to a private sector entity, consider the options below:
1. Perform a thorough cost-benefit analysis.
You should confirm that the services provided by a private company are, in fact, less expensive than having public employees providing those same services.
2. Hire an outside consultant to provide an independent assessment.
You should review the major exposures – including Contractual Liability, Operational Risk, Political Risk, Accident/Hazard Risk and Reputational Risk.
3. Carefully consider the sale or long-term lease of public assets.
Selling or leasing assets such as lotteries or toll roads are decisions that especially need to be carefully thought through. For these types of transaction agreements that are longer in duration, it is inherently difficult to assess their valuation, due to the long term assumptions that need to be made.
In conclusion, while personnel costs continue to be a big driver of budgets and concern, there are other possible areas to address including a lack of expertise, time constraints, risk transfer or a lack of additional sources of revenue. As with every big decision, make sure you carefully think through your approach before proceeding.
The material contained in this publication has been prepared solely for informational purposes
by Genesis Management and Insurance Services Corporation.
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Joe Proffitt
Underwriting Executive
Public Entity
Stamford, CT
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