Nine Steps to Successful Outsourcing

A November 5 Detroit News report on Detroit's fire department found that 21 residents of the city lost their lives to poor equipment and closed stations. Outsourcing this function to a private business might save and provide the city with management expertise that appears to be lacking.

Whether you run a business or are the head of a public or nonprofit organization, "outsourcing" offers one of the best ways to provide better services for less money.

Outsourcing is simply hiring another company to take over and run a service it can perform better and more efficiently than you can. Private companies can outsource services to other private companies. Public entities such as city governments or government agencies can outsource services to other public agencies, to private for-profit companies, or to private nonprofit companies or organizations.

Outsourcing is growing as a management tool for officials and executives in both government and the private sector. Spending by U.S. organizations — public and private — on outsourced business services is expected to triple from its 1996 level of $100 billion, to $318 billion by 2001.

Many municipalities routinely contract with private companies for such work as debt collection, property tax assessment, housing and community development, legal services, library management, motor vehicle maintenance, janitorial services, refuse collection, security, rodent control, parking meter enforcement, and security, to name a few.

Just the possibility that a city may outsource a service can give government service providers the incentive they need to improving service and efficiency. For example, when Flint Mayor Woodrow Stanley told city refuse collection workers that unnecessary expenses were forcing the city to consider outsourcing, they stopped their practice of picking up bulk items only during overtime, when they were paid more by the city. The Flint city employees increased the number of stops on their rounds and ended up saving the city 31 percent of what it spent on refuse collection the previous year.

But there are right and wrong ways to outsource services. For example, in order to be successful — that is, in order to save money and provide better services at the same time — the outsourcing process must include open, competitive bidding for contracts that are subject to periodic renewal. The contract terms must be written carefully to incorporate clear and appropriate safeguards. There also must be effective monitoring of performance to ensure the contract is being carried out as specified. Specifically, there are nine key steps to successful outsourcing, and they are as follows:

1. Do your homework. The whole point of outsourcing is to get the most for your money. If you do not pick the service provider that delivers this — and monitor whether the provider has made good on its promiseyou will fail. This means designing two systems: a bidding system that delivers the right provider and a monitoring system that tracks performance.

2. Involve key parties. Alerting groups that will be affected by privatization — students, parents, teachers, and local public school unions — is essential. When constituencies understand that they are part of the process, they often are more willing to work with administrators.

3. Issue Requests for Proposals (RFPs). An RFP is your signal to service providers that you are open for business. It lays out the requirements of the service you need someone to provide, and requests that contractors make bids after assessing how much it would cost them to fulfill the contract requirements. Many top-flight, standard-format RFPs for various services can be found on the Internet. These can be adapted to almost any city's needs.

4. Ensure a competitive environment. Perhaps the most important aspect of outsourcing is ensuring competition among vendors. Aggressively advertising your municipality's desire to bid out services increases the likelihood of drawing a large number of talented vendors.

5. Ensure quality work. Make it clear that the contractor's work will be inspected. Some contracts specifically enumerate the number of surprise and scheduled inspections a vendor can expect.

6. Employ a skilled attorney. In today's litigious world, you can't be too careful. The counsel of a business attorney is a sound investment. Too many deals have soured due to poorly written and/or misunderstood contracts.

7. Keep good, clear records. If you don't have a benchmark for where you started and where you expect to go, you can't measure whether you actually got there or whether there could be improvement in the process. Perhaps worst of all, you can't crow about your outsourcing success unless you have a record of what improved and by how much.

8. Make progress reports. Periodic progress reports on the contractor's performance should be disseminated not just within your organization or the contractor's, but with parties that have an interest in the success of your outsourcing venture. It might also be shown to others who might be interested in contracting with the particular vendor.

9. Do your homework — again! Successful contracting involves mastering many details. The more you prepare, the better off you will be should criticism emerge or a crisis erupt.

Always remember: Outsourcing is no longer new. You have plenty of successful examples to follow. No longer is there any reason why city services need to operate on a running deficit, when private contractors are waiting in the wings to provide better services at lower cost.

Detroit officials, take heart — and take note!

Michael LaFaive is managing editor of Michigan Privatization Report.