That outsourcing government work to private contractors will get the work done more cheaply and efficiently is an article of faith in some circles. It’s not always (or perhaps even usually) true. Ron Nixon, writing for the New York Times, reports on a study showing that government pays a lot more for private contracts than it does for having comparable work done in-house.
Despite a widespread belief that contracting out services to the private sector saves the federal government money, a new study suggests just the opposite — that the government actually pays more when it farms out work.
The study found that in 33 of 35 occupations, the government actually paid billions of dollars more to hire contractors than it would have cost government employees to perform comparable services. On average, the study found that contractors charged the federal government more than twice the amount it pays federal workers.
In the past, I’ve shared my own experience with bringing printing of bills for the General Assembly in-house — it resulted in some fairly substantial savings over the amount they were paying to contract out the printing.
As the chief legal officer for a now de-comissioned Navy research/development/production activity (“Naval Avionics”) in Indianapolis for a number of years, I saw what you’are saying first hand, Doug. Periodically we had to go through an exercise in which certain functions had to be reviewed to see if contracting out would be cheaper. Many of the criteria were stacked against continued performance by federal workers rather than their private contractor counterparts. It was clear that taxpayers were paying more for contracting out in many, if not most, cases, but the question seemed to be more idologically driven than by real numbers. The philosophy seemed to be that even though contracting out might be more expensive, it was a small price to pay for {“smaller government”). And then there was the practice of federal employees retiring and then going to work for a contractor doing the same thing for more money…..but that’s a story unto itself.
I’d think the problem is one of scale. The reason outsourcing is more efficient for any business is that there is a task that costs a business a certain amount of manpower to accomplish. They can outsource it to someone else who specializes in that task, so they will do that task and only that task for a number of businesses. Because the contractors have a number of different clients, the fixed expenses are spread out and they can be both profitable AND provide the service for less than it costs the original business.
But government contractors seem to mainly do government work. That is they may have a few different government offices, but they are still just doing the government work. And thus they are left with the ability to either provide the service cheaper than the government could do on its own OR they can do it profitably.
Maybe the government should rule that they won’t award contracts to any firm that has more than 75% government business. After all, if more than 75% of a company’s business is coming from the government, the government should just do the work themselves.
That makes sense, Mike. One of the biggest engineering services contractors to the Navy and other branches of the military did virtually no private business, or very little.
It’s not a bad idea; but there might be situations where the vendor crosses jurisdictions in a way that saves money for each particular government unit. That might call for some kind of interlocal agreement to achieve the same efficiencies; but those might not be manageable if the localities are far away.
It’s an article of faith in circles in both directions, pro and con of course, and I agree with your follow-up comment, Doug: There are some instances where there are savings, there are others where there are not.
As one who works in private enterprise taking work outsourced by corporations, I know that one main reason for outsourcing, and source of savings, is that personnel is expensive if you have to provide benefits, office space, insurance, vehicles, etc., to employees. Corporations have sliced all that off, with plusses and minuses there too.
The biggest minus I see is the loss of institutional knowledge, which makes the enterprise less efficient. The biggest plus to the company is the bottom line savings- which is also the biggest minus to the employees. As a contract employee, I do not get benefits, and as soon as I’m done with one project, I’m essentially unemployed. But, because I get paid by the completed job and not by the hour, my incentive sits with getting the job done faster. No incentive to drag heels. So, if I can line up plenty of work, and I’m good at it, I can beat the crap out of the hourly wages formerly offered by the corporations. In a downturn like this, not so much.
I’m not in agreement with Mike’s call for a 75% rule. In some industries, if you aren’t doing government work, you’re not working. Many of the industries that are dependent upon growth have had to turn to government work for survival. A 75% rule would turn some firms into 0%. Besides- if they’re good at what they do, and they provide a genuine cost savings to government, why shouldn’t they do what they specialize in?
The other issue with limiting the percentage of government work centers around the differences between private sector and public sector accounting. I worked for a company that performed hundreds of millions of dollars of DoD, DoE, and EPA work each year. When you hit certain thresholds ($100mm and $250mm when I was there in the mid-90’s), you must adopt almost all of the public sector purchasing and project accounting methodologies. At some point, it makes more sense to bifurcate your private sector business from the government business so each method can optimize their operations.
I am all for privatization when the following criteria are met:
1. It reduces expense while maintaining measurably similar standards of performance. The key being measured standards to ensure performance is commensurate with the requirements.
2. It is competitively outsourced. This, in my opinion, does not include granting perpetual (or effectively perpetual) monopolies – nothing is solved by doing that. The function should be periodically RFP’d to make sure the best outcomes.
3. The private implementation incentives are aligned with the stated goals of the program. This is a big one for me, because I think government often privatizes services to avoid politically charged discussions around the services themselves. For example, if you want to reduce Medicaid spending without actually voting on the issue, outsource it with incentives to the private firm when rolls are reduced. If we want to change the basis for Medicaid eligibility, then have the wherewithal to have the debate and pass the legislation.
4. It is not a core function of government. By this I mean things like fire, police, courts, or any other area where the rights people grant government are transferred to a non-governmental entity. This is why I think outsourced prisons are a bad idea: we are outsourcing a function that takes away a fundamental right of a citizen, and those functions should not exist outside the framework of elected government.
When those things align, I think outsourcing makes sense. My experience is that outsourcing rarely works – mainly because the private firm knows that the best way to make the most profit is to perform inefficiently and extend cost-plus projects, consulting fees, and the like, since the oversight of the contractor is underfunded and the contract itself lacks adequate enforcement. In these circumstances the private firm just goes into vampire mode and bleeds the appropriation dry.
In regards to contractors vrs gov employees – I have worked at a large naval base in southern Indiana for 35+ years – when a decision was made a few years ago to bring in contractors, the contractors entered in to a “teaming” agreement with each other. What this means is if a contractor doesn’t have an employee capable of perfoming the job, then Contractor A can go to one of it’s “teaming partners” and basically sub-contract to Contractor B for a qualified person. The problem with cozy little arraignment is the Gov not only pays for the contractor but does so twice as Contractor A gets to charge for the labor with overhead, G&A, etc and Contractor B get to charge for the overhead/G&A for having that employee on the books. I’m certainly no expert but that seems like double charging to me.
If that’s the way it works, that is seriously messed up.