Guide to Competitive Sourcing

In September, The National Federation of Independent Business and the Reason Foundation, an institute that produces globally recognized privatization research, released a 32-page study titled "A Legislative Guide to Competitive Sourcing in the States (and Elsewhere)." The guide was written by the Reason Foundation’s Adrian Moore, Geoffrey Segal and Rebecca Bricken, and it is designed to help policymakers privatize in the most effective way possible — that is, by doing it right the first time.

The guide notes that with recent increases in competitive contracting, states may need to update the guidelines and policies in their contracting rules.

Privatization has been on the rise. According to the guide, "the value of all federal, state and local government contracts with private firms — including service outsourcing agreements — is up 65 percent since 1996, reaching a total of over $400 billion in 2001." Other studies suggest that contracting has been driven in recent years by state budget troubles. A nationwide survey by the Council of State Governments, for instance, found in 2003 that among the state budget officers and legislative directors who responded, 68.4 percent said a primary reason for privatization initiatives in their state was to save money. The Mackinac Center for Public Policy surveyed every school district in Michigan in 2005, after several years of slow growth in state education budgets, and found that the number of districts that privatized busing, food or janitorial services had increased from 31 percent to 35.5 percent since 2001.

The guide notes that with recent increases in competitive contracting, states may need to update the guidelines and policies in their contracting rules. The report is therefore designed to share "best practices," thus "ensuring transparency, accountability, and the delivery of high performance."

The report contains five major sections:

  • "Definitions." In keeping with the Socratic idea that the beginning of wisdom is the definition of terms, the report starts by defining eight privatization-related words or activities, such as "contracting out," "public private partnership" and "inherently governmental." Using a four-part format that appears throughout the study, the authors accompany each definition with a related policy recommendation, a specific example of the recommendation, the reasoning behind it, and — helpfully — the potential pitfalls in following it.

  • "Authority to Competitively Source." The guide describes how legislation and executive orders can encourage administrators to consider privatization when they might otherwise avoid the risks that can accompany a high-profile privatization. The guide further recommends adopting "policies for evaluating internal and external service delivery options when expanding services or adding new services," so that administrators are encouraged to consider competitive contracting from the outset whenever a government unit decides to expand its activities.

  • "Competitive Sourcing Process." This section describes how well-organized government practices can encourage effective competitive contracting. One potential error is to let each state agency design its own particular requirements for contracting. This process can unnecessarily multiply contracting standards and force companies that bid on multiple contracts to expend extra resources in complying with many varying requirements, driving contract costs upward without benefit.

One reason Southwest Airlines flies only one type of aircraft is so that its mechanics need to learn only one system. The same savings can be obtained by having state agencies use similar privatization processes whenever possible.

  • "Implementing Competitive Sourcing." The authors suggest that government agencies evaluate bids on a "best value basis," a process that weighs both price and quality considerations. (The Mackinac Center for Public Policy counsels that a "request for proposals" should not require automatic acceptance of the lowest bid, though administrators should offer a very public explanation whenever the lowest bidder is not selected.) The study’s authors also recommend "performance-based contracts," which specify the desired results, but allow contractors to propose their own methods for achieving the outcomes.

  • "Post Competitive Sourcing: Oversight and Enforcement." The guide emphasizes the importance of auditing and of regular reporting to public officials and the public itself. These practices not only "ensure performance and accountability," but allow privatization to remain "transparent and readily accessible to policy makers and the public."

This report belongs in the reference library of policymakers who want to explore privatization. It is not the first and last word on privatization, but as a quick guide on best practices, it was not designed to be. Policymakers should use it to design privatization strategies that benefit from the experiences of others.

Michael D. LaFaive is director of fiscal policy for the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy.