What Happened?
An analysis of contracts published in The Official Journal of the European Union shows that Britain is about to experience “the biggest wave of outsourcing since the 1980s,” according to a recent Financial Times article. According to the analysis, contracts valued at more than $6 billion are being negotiated this year.
It’s Overseas, So Who Cares?
The data help validate the trend happening here in the states, and provides new ammunition for municipal managers looking to justify their outsourcing strategies. In short: Outsourcing is on the rise, and municipalities that fail to consider the strategy do so at their own peril.
Where is the Growth?
In Europe, it appears that public works, pensions, defense, local government and justice are major drivers. Justice refers to prison outsourcing; the article noted that nine UK prisons are being privatized in the coming weeks, with another eight to 13 being privatized in the next three years. Outsourcing of public works is expected jump globally over the next several years, as well.
Lessons Learned
As was widely publicized last year, the UK made some major outsourcing mistakes that led to cost overruns and delays on major projects (most of which were IT outsourcing projects). Among the reasons for the outsourcing failures: a disconnect between the project goals and measurements for success.
To ensure those errors aren’t repeated, may of the UK contracts include performance-based metrics. For example, when prison outsourcing firm Serco took over a UK prison in 2011, their revenues were tied to recidivism rates; according to the company, “10 percent of Serco’s annual revenue will be contractually dependent on it achieving a five percentage point reduction in reconviction amongst offenders discharged from the prison in each year of the pilot.”
What About Here?
In the U.S., outsourcing continues to grow at a rapid clip. According to Forrester Research, state and local government outsourcing of IT alone exceeds $20 billion, and most categories—from parking outsourcing to prisons—are on the rise.
According to recent reports, outsourcing categories that are on the rise include:
- Parking: An annual privatization report published by the Reason Foundation called parking privatization “hot,” citing major initiatives in New York, Pittsburgh, Sacramento, Memphis, and Harrisburg, PA.
- Zoos: The same report called zoo outsourcing “standard,” noting programs in Los Angeles, Tulsa, North Carolina, Michigan, Indiana, and elsewhere.
- Computing: The Practitioner’s Guide to Outsourcing cited financial management systems and payroll systems as commonly outsourced by municipalities. Gov1 recently covered IT outsourcing initiatives in two Massachusetts cities, Melrose and Methuen. According to the Practitioner’s Guide, other commonly outsourced functions by state and local governments include:
- Sold Waste Collection and Disposal: This is often outsourced not only because of the capital costs required, but because of the environmental regulations and risks involved.
- Tree Maintenance: This public works function is also considered high risk, using “limited purpose capital assets” like loaders, chippers, and grinders.
- Waste and Wastewater: This function is often outsourced to other governments or a public authority, which helps spread capital costs across a larger customer based. Gov1 recently covered a sewer outsourcing relationship in Ohio.
- Ambulance Services: Outsourcing to highly skilled emergency medical services firms is increasingly common, and even fire and police forces are now being combined or outsourced. Recent police and fire coverage can be found here.
- Legal Services: Most municipalities already outsource complex litigation and labor law issues, as well as negotiations with cable and telecommunications firms. But some municipalities outsource all legal services.
- Towing and Vehicle Storage: Small cities and towns may simply lack the volume to do this in house; large cities may want to shed liability and compliance risk.
Next Steps
Gov1 tracks privatization and outsourcing issues weekly, so stay tuned or click “Outsourcing & Privatization” in the left-hand column of any page on our Web site. If you’re seeking information about the European contracts mentioned in the article above, check out the EU’s free TED system, which stands for “Tenders Electronic Daily.”