Outsourcing and the Public Sector

This paper presents a brief survey of contemporary arguments and research findings concerning outsourcing or contracting out in the public sector. Outsourcing is an arrangement whereby a contracting agency enters into a contract with a supplier from outside that agency for the provision of goods and/or services which typically have previously been provided internally. It is often combined with competitive tendering for the contract to provide the goods and services (pp 1-2).

While governments have always purchased some goods and services externally, in the last two decades there has been a movement to the wholesale use of competitive tendering and outsourcing as a tool of public management. These reforms have been driven both by budgetary pressures requiring reduced government spending, and by the influence of economic theories about public administration. Policies on contracting out have been adopted by the Commonwealth government and most State governments. Labor and Liberal/National governments have both supported the use of competitive tendering and contracting, although conservative governments have generally been more disposed to favour its use on theoretical grounds as a preferred method of service delivery. In New South Wales the use of competitive tendering and contracting has been growing rapidly; reported expenditure on contracting in the public sector in 1995-1996 was $1.76 billion (pp 2-10).

The paper outlines some methodological and other considerations in assessments of the benefits and savings from contracting out (pp 10-13), and summarises some recent surveys on the empirical findings of studies of public sector contracting. Some studies report considerable savings and increased efficiency, while others find no benefit or even increased costs resulting from tendering and contracting (pp 13-16).

The advantages of contracting out include the potential for: cost savings; increased accountability of service providers through contract specifications and performance measurement; better work and management practices; access to greater skills, knowledge or technology; better use of capital and equipment; better service quality; greater flexibility in services; local industry development; and fewer industrial relations issues (pp 16-22).

The disadvantages of contracting out include the potential for: reduced accountability of government for contracted services; loss of privacy and confidentiality of personal information; collusive tendering and other tendering problems; loss of control by the government over the contracted services; reductions in quality of services; the costs of outsourcing; savings to government resulting from losses to other groups, rather than from increases in efficiency; and the effects on levels of employment and on the wages and conditions of employees of contractors (pp 22-29).

The question of what kinds of government services should be outsourced depends on one's theoretical perspective on issues such as the extent to which the private sector should be involved in the provision of government services. It also depends on practical considerations as to what services can successfully be outsourced, in the sense that the desired cost savings and service quality will be achieved. The paper includes guidelines on assessing the scope for competitive tendering and contracting published by the New South Wales Service Competition Project Advisory Committee of the Council on the Cost of Government (pp 30-32).