Outsourcing in the Public-Private Partnership Realm – a good idea?


The following headline recently caught my attention:
Bill would OK secret privatization, outsourcing of Florida agency functions”
What is not news is that State and Local Governments (SLGs) are struggling to maintain the services their electorates are accustomed to. Blame declining tax revenues caused by the housing market bust and the “Great Recession”. But unlike the Federal Government, SLGs do not have unlimited resources to deal with budget shortfalls. So officials find themselves playing with the unpopular options of cutting services and/or raising taxes. In the search for a silver bullet, the concept of Private-public partnerships (PPPs) is garnering increased interest.

The idea behind a PPP is that the private sector (typically a consortium of companies that provides the development, operation and financing of the venture) will assume control of, and delivery risk for, a given public project or service. In many cases, the PPP deal includes the privatization of public assets. Reimbursement is provided by the public, either through payments from the SLG entity (funded by the taxpayer) or by the users of the service itself (e.g., tolls, parking meter fees). Of course, there are many variations possible (the government may have a stake in the consortium, the payments may be a mix of government funding and usage fees, etc), but the general concept is the holistic outsourcing of government function(s).
PPPs are expected to:

  • Decrease the cost of services and improve service quality, because private enterprises can apply proven processes, technologies and capabilities that the public sector (especially at the SLG scale) was never chartered to develop
  • Provide SLGs with immediate access to funds in the short term through the monetization of public assets and/or an up-front cash payment amortized over the life of the deal (in the form of increased downstream payments to the vendor)
  • Transform the way governments do business, by leveraging innovation and funding not available to the public sector (think automation of manual processes (e-Government initiatives) and capital for development projects (new roads, power generation facilities, public transportation, water systems and other public facilities, etc.))

Having worked government IT procurements both in the role of service provider and sourcing advisor, I can see potential benefits and risks with PPPs. Because initiatives of this nature are, in the view of many, likely to become more prevalent going forward, it’s important that our elected officials structure procurements that strike the right balance between expediency in the short term and protecting the public good in the long term. It’s also important for service providers to anticipate how increased use of PPPs will change SLG sales cycles.

First question: Are PPPs a good idea?
It’s easy to be pessimistic. Look at the recent press: The City of Paris decides not to renew its water outsourcing contract; the UK NHS cancels its National Programme for IT; two major state IT outsourcing deals – Texas and Virginia – have suffered major disputes (with payments being withheld); the Chicago Parking deal continues to cause controversy (most recently, a $13.5m bill presented to the City for cars displaying disabled plates and placards); state agency outsourcings in Texas and Indiana are cancelled.

But in fairness, there are countless SLG outsourcing deals that reportedly do work out (e.g., City of Minneapolis, Oklahoma Dept. of Human Services, UK South West Water). Also, while not as high in terms of publicity, we all know that in the commercial sector cancelled ERP projects and failed outsourcing deals (check recent headlines) are all too commonplace.

So, like any outsourcing initiative, PPPs are only as good (or as bad) as the degree to which they:

  • Meet the needs of the client (i.e., the SLG and its citizenry)
  • Provide value beyond what the client (the SLG entity) could achieve itself
  • Are supported by agreements reflecting outsourcing best practice, especially including reasonable flexibility for both parties (I highlight this point because some PPP deals have terms that are unheard of in the commercial world. For example, the Chicago Parking deal’s term is 75 years!)
  • Have the appropriate governance mechanisms in place to deal with the typical considerations for an outsourcing agreement, such as operational and commercial issues and changes in requirements, plus be equipped to account for the political dimensions of a PPP arrangement.

Second question: How should SLGs approach PPPs?
The Florida Bill cited at the beginning of this post allows for outsourcing of State agency functions to be performed without public disclosure. From the perspective of a citizen, I’ll leave it to the reader to decide whether the potential lack of transparency and opportunity for public input is acceptable public policy. From the perspective of outsourcing, however, there are measures that Florida, or any SLG entity, should consider to improve the efficiency of PPPs.

Anyone who has responded to a government RFP or worked with a government agency to prepare RFP documentation knows first-hand that there is a fair amount of bureaucracy and stringent procurement procedures to contend with. While this kind of rigor was developed to ensure “fair and open” competition, it significantly lengthens the time (and expense) required for government agencies to prepare procurements, for service providers to respond to these procurements, and for evaluation, down-selection and negotiation of an agreement.

Another challenge with public sector procurements is the specter of protests. In a recent outsourcing on which I was working with a major US municipality, procurement rules forced the city to cancel and re-issue an RFP when the city’s requirements significantly changed. In the commercial world, however, we could have addressed this merely with an RFP supplement issued to the participating bidders notifying them of the change, and perhaps extending the submission timeframe. This aspect of public sector initiatives significantly restricts the flexibility of SLG officials, who must be careful not to put their outsourcing initiative at risk of significant disruption. For example, in the HUD HITS project, Lockheed protested the award to EDS, and EDS later filed its own protest. After an 18-month delay due to these protests, it was reported that HUD ended up splitting the deal between to two parties just to move forward with the program.

While SLGs should be encouraged to adopt the best practices of the commercial sector, they also must retain the safeguards necessary to protect the public good. After all, in the commercial world, we as consumers can “vote with our feet” and use another product or service if we are dissatisfied. As employees, we can (albeit not without pain), choose to work for another employer if we disagree with the company’s direction. As citizens, however, most government services are monopolistic in nature (think roadways, health and human services, correctional facilities, police and fire, water and sewer). These functions serve the public good, so if there is a bad deal done (which, as we’ve stated above, does happen), citizens may have no alternative, save for moving to another jurisdiction (hardly a practical solution for most – especially in this economy). So the ideal scenario is to retain the structures that promote “fair and open” competition, while loosening the procurement rules to permit greater flexibility and agility.

Final question: What are the ramifications of PPPs on the Service Provider community?
Outsourcing by all levels of government is nothing new, but the outsourcing of the past has been more at the level of a specific program or function (e.g., State Welfare Eligibility and Claims processing). With sustained economic pressures, don’t be surprised to a see a trend towards outsourcing of larger components of business functions (perhaps entire business functions, in some cases), along with some form of privatization of the applicable public assets that support them. Yesterday, it was sufficient for Service Providers to build relationships with public officials to influence the direction of upcoming SLG outsourcing initiatives. Tomorrow, governments will be looking to the private sector for solutions, not services. This will require a more entrepreneurial mindset on the part of service providers and their SLG sales teams, with an emphasis on:

  1. Understanding a broader set of goals and objectives at a “whole of government” level (e.g., job creation components)
  2. Building consortia that include entities to manage risk (insurance), physical assets and venture capital or other forms of financing
  3. Developing “out-of-the-box” solutions that can serve as an alternative to the more typically mandated “level” government procurement playing field
  4. Acquiring the savvy to understand political positioning and management of public perception, because PPPs expose service providers to the public in our everyday lives (not only when a back-office deal goes bad enough to make the headlines).

PPPs, if managed well by both SLGs and service providers, can offer significant benefits to both parties, and ultimately the public-at-large. Realizing this potential will require changes in paradigms and behaviors on both sides of the table (SLGs acting more like businesses; service providers acting more like entrepreneurs). Those who are ready to embrace the future will be well-positioned to catch this building wave.

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