IV. The Make or Buy Analysis: A Step-by-Step Guide

If everything in the budget is a zero-sum game, the only way you can provide new programs for kids is to run things more efficiently. Private enterprise can help us do that.[53]
          —Dr. Robert Winter, Superintendent
          Wayne Township Public Schools, Wayne, New Jersey.

Make or buy? That is the question school administrators must first answer. Cost is not the only consideration when thinking about contracting for services; factors such as service quality, managerial flexibility, and community support should be weighed as well. School administrators contemplating alternative methods of service provision should begin by assessing the following:

Step One: Identify Costs
The reason most often cited by government agencies for contracting is cost savings.[54] For administrators to make informed judgements, valid comparisons must be made between the costs of in-house and contracted service provision. It is not an easy task. Few school districts have formal accounting methods for making cost comparisons. Frequently, cost estimates fail to fully allocate overhead costs such as payroll processing time, accounting, purchasing, supervisory management, and utilities. Pension costs, benefits, and facility and equipment costs are often overlooked as well. In fact, in-house costs are routinely underestimated by 30 percent, according to public-finance expert Lawrence Martin.[55]

A guidebook by the consulting firm KPMG Peat Marwick encourages administrators to ask the following:

If the district stops providing its own support services and relies on a private provider, will a given cost continue?[56]

In addition to identifying the fully allocated cost of current services, districts must also ask themselves what additional costs might be incurred by contracting out. Additional costs could include the cost of bidding, monitoring, and administering the contract. Once the total costs of both in-house and contract services have been identified, appropriate cost comparisons can be made.

For assistance in comparing costs, consult the Mackinac Center for Public Policy / Reason Foundation's How-To Guide #4, How to Compare Costs Between In-House and Contracted Services.

Step Two: Determine Availability
While there are many companies supplying school services, they may not be available in every geographic area and in the same number. Districts situated in areas with large numbers of providers will have greater choices in the type of service provided, the level of service provided, and the quality of that service. Administrators should check the availability of quality service providers before making plans to contract for a given service.

In addition, some states heavily regulate the use of school contracting. Such restrictions may prohibit contracting for certain kinds of support services or allow it only in certain circumstances. Legal counsel can advise school administrators about local restrictions.

Step Three: Assess Quality
School officials should also examine the quality of available services, for both in-house and private-sector providers. Are the schools getting the most value for their dollar with in-house provision? Or are services costly and unreliable? What is the level of customer satisfaction? Similarly, when looking to outside providers, school administrators must not neglect quality in the quest for efficiency and cost savings. School administrators should make site visits to other schools using the contractor under consideration. Bid proposals specifying the level of service to be delivered should be scrutinized and carefully selected. Once the contract has been awarded, to verify that quality services are actually being delivered, the contractor's performance should be measured and monitored on a regular basis.

Says Dr. Robert Winter, superintendent of the Wayne Township Public Schools in New Jersey, "It's a tradeoff. You don't always want the lowest bid. You want to make sure that you achieve your goals and still have services that provide quality for children. You need to be very careful about guidelines, and be selective."[57]

Step Four: Communicate with Employees and the Community
Despite evidence of considerable benefits, school boards and school administrators often face strong opposition to competitive contracting. Public employees and their unions may view it as a threat to their jobs; the local community may not be receptive to a change in a familiar routine.

Those wishing to introduce school contracting should consider its appropriateness within their own local communities. If the decision is made to solicit bids, strong leadership will be essential for success. "It's very threatening to people to have an outside management company come in," says Dr. Richard Schilling, Assistant Superintendent of the New Rochelle City School District in New York.[58] "You have to have commitment from the very top, from the Board of Education and the Superintendent, because you're going to take a lot of flak," he says.

The most effective strategy in dealing with these concerns is to communicate. Be open and honest about any potential changes. Often, objections to school contracting are the result of disinformation or a lack of information. If the contracting arrangement will involve unionized employees, school administrators should meet with union leadership to discuss how it will affect staffing levels, compensation, and current union agreements. Many districts require the contractor to offer employment to any public employee displaced by the transition.

To put the market to work for
schools, contracts must be:

  • Carefully designed with well-thought out specifications.

  • Competitively bid on a periodic basis.

  • Carefully monitored to make sure that the provider adheres to contract provisions.

Remember, however, that schools exist to serve students, not school employees. If schools can obtain quality services at a lower cost by contracting with the private sector, they should be allowed to do so. Consult Appendix II for suggestions on working with public employees.