Managing High-Risk Outsourcing

Outsourcing is a strategy used by many municipalities in an effort to provide high quality public services at a low cost. Unfortunately, outsourcing has not always achieved these goals. In this paper, we describe a variety of techniques that a municipality can use to manage the vendor of a high-risk outsourced service.
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\nTo identify the nature of the risk, a municipality needs to assess a service that is a candidate for outsourcing from three perspectives: citizen sensitivity, supplier market, and switching costs. Although some outsourced activities are almost risk free, there are many others where a combination of high citizen sensitivity, low competition, and high switching costs make outsourcing more risky.
\nA high-risk service may still have considerable potential for improving the cost-effectiveness of a municipality’s public services. To achieve this potential, however, a high-risk outsourcing contract requires strong performance measures, a high level of ongoing communication and cooperation to fill the gaps that are inevitable in any high-risk contract, and a full linkage with the municipality’s management control system. In particular, outsourcing a service does not mean excluding it from a municipality’s ongoing process of programming, budgeting, reporting, and evaluating. Indeed, the reporting phase of the management control process must focus on both the results being produced by the vendor, and the monitoring activities of the department within the municipality charged with managing the vendor. Otherwise, the municipality’s senior management may learn too late of emerging problems.
\nFinally, periodic evaluation is essential. It is possible, for example, that another vendor, working in another municipality, has developed some considerable expertise in the outsourced activity, such that a change in vendors would improve the quality of the service, lower its cost, or both. This kind of information ordinarily will not emerge during the normal monitoring of the existing vendor.
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\nIn short, when a municipality engages in high-risk outsourcing and wishes to assure its citizens that the cost savings are not matched by a reduction in service quality and features, it must develop an appropriate set of outsourcing management activities. Given that many outsourcing arrangements are high-risk, a focus on these activities is essential.

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