Managing Local
Government Service Delivery: Harnessing the Benefits of Contracting
Trevor L Brown
brown.2296@osu.edu
(614) 292-4533
Matthew Potoski
Department of Political Science
potoski@iastate.edu
(515) 294-2935
Contracting and Contract Management
Under pressure to do more with less, governments across the country have increasingly moved from direct service provision to providing services via contract. Citizens today receive public goods and services not only from their general service local governments, but also from a variety of vendors working under contract, including for-profits, non-profits and government agencies from other jurisdictions. Of course, there are many accounts of successful contracting. Advocates of such alternative service delivery arrangements promote competitive contracting with promises of efficiency, cost savings, and improved effectiveness (Ferris and Graddy, 1991; Ostrom and Ostrom, 1977; Stein, 1990). At the same time, the academic literature and popular press are fraught with accounts of contracting disasters where governments have been badly burned by unscrupulous vendors. Citing a growing number of incomplete, failed, and corrupt contract arrangements, critics argue that contracting creates numerous accountability problems, sacrifices service quality for efficiency and cost savings, often does not result in improved efficiency and cost savings, and ultimately “hollows” the state (deLeon and Denhardt, 2000; Milward, 1996; Milward, Provan, and Else, 1994).
Missing in this debate is rigorous analysis of the capacity of both governments and contract vendors to manage the contracting process. Contracting is not a “one size fits all” proposition. The success or failure of any alternative service delivery arrangement likely depends on how well governments are able to manage the entire process, from assessing the feasibility of contracting for particular services, through implementing contract arrangements, to monitoring and evaluating service outcomes and vendor performance – activities that require strong government management capacity. When governments can easily and quickly write very detailed contracts describing exactly what actions the vendor should take and what outcomes the vendor should achieve, the risks of contract failure are reduced, and consequently the costs inherent in negotiating, implementing and monitoring a contract relationship are low. However, real world complexities and uncertainties in social interaction often exceed governments’ ability to predict future events, specify contract provisions for all circumstances, and ensure that actual outcomes match defined objectives.
A fundamental decision confronting all organizations is
choosing whether to internalize production (i.e. to make it) or to externalize
production (i.e. to buy it through contracting). Transaction costs scholarship
argues that organizations’ production choices reflect the relative costs of
traditional production factors – the costs of fixed assets, labor, and capital
– and transaction costs – the “…comparative costs of planning, adapting, and
monitoring task completion under alternative governing structures (Williamson 1981:
552-553).” Transaction costs are
essentially the management costs associated with either internally producing
the service or buying it through contracting (Coase, 1937; Williamson, 1981, 1996). Transaction costs are often higher under
contracted service provision. For example, for many public services it is
difficult to measure service outcomes (i.e. fire prevention) and therefore
specify how contract vendors will be evaluated. According to transaction costs
logic, governments should internalize high transaction costs services; if
governments decide to contract in pursuit of efficiencies and cost savings,
they will need to implement high transaction costs oversight and management
procedures to mitigate associated contracting risks. Transaction costs theory provides a framework
for analyzing which services should be contracted and how to manage contracts
to improve contract success.
In our previous work (Brown and Potoski 2003a, 2003b, 2003c),
we began to address these issues. We synthesized transaction costs principles
with insights from theories of government organization and urban development
scholarship. Theories of government
organization frame relations among government agencies, elected officials and
constituents (Bawn 1995, Epstein and O’Halloran 2000).
The urban development literature (i.e. Stein, 1990) argues that
governments have more choices about how to structure contracts when the market
of potential service providers is robust. For example, governments located in
large metropolitan areas are more likely to contract for refuse collection
simply because they have more opportunities to do so. First, we investigated the factors
that influence governments’ service delivery choices (Brown and Potoski,
2003a). Our analysis of the service
delivery practices of over 1,500 local governments for 64 different services
shows that governments select service production options to address the
variable transaction costs risks inherent in the service marketplace and in the
particular service to be delivered. When
governments contract for highly asset specific services, those that tend to be
offered through monopoly-dominated markets, they choose mechanisms that lower
the risk of vendor opportunism – namely contracting with other
governments. When service outcomes are
difficult to measure, governments decrease their reliance on contracts with
private firms and increase their use of joint contracting and internal service
production.
Second, we examined how municipal governments manage their capacity to deliver services under different production arrangements (Brown and Potoski, 2003b). Effective contract management requires mitigating specific problems that can plague the contract process. These problems arise from dissatisfaction with prior contracting experiences; transaction costs; characteristics of the government’s structure and operation; and characteristics of the governments’ external environment. Third, we analyzed how governments use four contract oversight procedures – monitoring citizen complaints, implementing citizen satisfaction surveys, analyzing vendor performance data, and auditing vendor activities in the field – to help better monitor vendor performance and thus mitigate the risk of contract failure (Brown and Potoski, 2003c).
Case Study Summaries: Police Service and Refuse Collection in Columbus Ohio
Building on this empirical research, we have begun to explore
service delivery practices up close through a series of case studies examining
relations among citizens, governments, and service vendors. Over the past year, we have been studying two
service areas – refuse collection and policing – in nine communities in the
In the logic
of transaction costs scholarship, refuse collection with relatively easily
measured outcomes and outputs and assets that are relatively unspecific, is a
prime candidate for successful contracting, particularly in a larger
metropolitan area where vendors compete for contracts. Our case analyses so far
indicate that this is the case for most suburban governments. Only two
governments in our case sample –
Policing poses
more severe management challenges with difficult to measure outcomes and assets
that are relatively specific. None of the police departments in the case sample contract for core
policing services (i.e. traffic control, investigation), although many
outsource some of their peripheral functions (i.e. forensic analysis, animal
control). When asked about
whether financial pressures existed that might stimulate the expansion of
contracting for policing tasks, the interviewed police chiefs typically
indicated that they were largely buffered from budgetary issues. This is not to say that police chiefs were
not sensitive to cost concerns; on the contrary all could list several steps
they had taken to reduce costs. Rather,
they all indicated that policing was such a central concern in each community
that most departments had been spared severe budget reductions relative to
other city services. In addition, most
noted that there was not really a market for the services they performed in the
metropolitan area. When they did
acknowledge areas where they lacked capacity, the default means of addressing
the deficit is to enter into a mutual aid agreement with a neighboring police
department. For example, many suburban
police departments have mutual aid agreements with the
Taken together, our interviews with public service directors regarding refuse collection – a service with fewer transaction costs risks – and with police chiefs regarding core policing services – a service with considerable transaction costs risks – suggest that a quartet of factors influence whether governments decide to contract, and if they do, what types of steps they take to manage the contract process. These factors are similar to those that we discovered in our empirical analysis and are described below.
Fiscal
Imperatives
The genesis for most contracting arrangements is the drive to reduce costs. The combination of expensive service related costs, economies of scale, and community cost pressures often fuel the drive to seek alternatives to direct service provision.
Service-Specific
Contracting Risks
Some services are more risky contract targets than others. Services that require highly asset specific investments, such as buying specialized equipment or developing service specific technologies, are better delivered in-house by governments than by contract. Likewise, services whose outcomes and outputs are more difficult to measure are also riskier contract targets.
Market
Conditions
Successful contracting requires a robust market of competitors. Competition need not come only from private firms, but may also include non-profits and other governments. In such contexts, governments can compare prices and practices across vendors while competitive pressures discipline contract winners.
Government
Capacity
Managing contracts requires attention across the service delivery process, from negotiating and developing contracts, to monitoring service delivery outputs, to ensuring outcomes match specified objectives. To mitigate the risk of contract failure, governments can adopt procedures to improve contract management, such as mechanisms for reviewing and correcting vendors’ performance during the course of service delivery.
Next Steps: Listening to
Vendors
Previous research on alternative service delivery has tended to neglect the perspective of “street-level” managers who actually produce the service. We believe this perspective is vital for a complete understanding of the service delivery process. For example, in our first round of interviews, we noticed that several managers reported consistent themes in their contracting experience. At first, these managers were quite dissatisfied with their vendor’s performance. According to these managers, the vendors’ performance did not improve, even in the face of corrective measures, until they threatened terminating the contract and replacing the vendor. An obvious omission from this account is the vendors’ perspective: how did they view their own performance, their relations with the government, and how these changed over time? Consequently, our next step is to interview service vendors. This means interviewing service vendors in the event of contracting, and comparing their experiences with those of managers engaged with internal service production in other jurisdictions.
In the area of refuse collection we will interview the area supervisors and contract managers for each of the vendors to investigate how they have responded to steps service directors have taken to improve contract performance. In particular, the interviews illicit information about whether different contract arrangements provide refuse vendors with more flexibility over other arrangements. For example, in latest round of contracting, some of the public service directors have added penalty clauses to their town’s contracts. Consequently, we will ask refuse vendors about whether they manage their contract relations with communities that impose penalty clauses differently than those than do not impose penalties.
For police
services, interviews with the suburban police chiefs indicate that there are
two areas where they outsource – forensics and jailing. All of the governments send offenders in
their communities to the county jail of the county in which the illegal
activity takes place. The county jails charge each community a per diem rate
for prisoners. Most of the suburban
communities maintain small holding facilities, although by law they are not
jails. However, because of rising per diem costs, some have considered
converting their holding facilities into legal jails. Interviews with representatives from the
respective county jails will provide insight into how the per diem rates are
calculated and whether increases in these rates are designed to stimulate
suburban communities to handle more of their own jailing responsibilities. For forensics, all of the suburban
communities rely on either the City of
Taken together these interviews will map out the service marketplace in each policy area more completely. At the moment, our primary view is through the lens of the purchaser – the government procuring the service. In order to get a better picture of the service marketplace and how it affects the delivery of these two public services, we require corresponding views from the vendors. Our overall objective is to build the case studies and then integrate them with our survey based research, thus focusing multiple analytic lenses on the full service delivery process, from feasibility, through implementation, to outcome assessment.
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