Introduction

Many attempts to inject competition and market forces into government operations fail. As we have examined hundreds of programs at every level of government across the country and around the world, we have identified six key political and organizational strategies for successfully implementing competitive strategies. These are:

• Need for a political champion;
  
  
• Adopt a comprehensive approach;
  
  
• Don’t study it to death;
  
  
• Create a high-level central unit to manage competition;
  
  
• Uncouple the "purchaser" and the "provider"; and
  
  
• Design an employee adjustment strategy.

Strategy #1: Need for a Political Champion

A revolution doesn’t just happen. Quantum changes such as those described in this guidebook require leaders — forceful leaders who possess a coherent vision of a new and better governance. Citizens must provide the impetus for dramatic change by expressing their discontent, but it requires leadership to direct that energy into constructive channels.

Achieving privatization and competitive government reforms requires leaders who will expend political capital on the issue and who have the skills to secure approval and support from service other wings of government whose cooperation is key to success.

Out of hundreds of governments we have studied over the past two decades, we have found relatively few examples where the kinds of changes we have outlined have occurred without a strong and determined political champion who is willing and able to withstand withering opposition to reform. Writes historian James McGregor Burns: "Leaders, whatever their professions of harmony, do not shun conflict; they confront it, exploit it, ultimately embody it .... But leaders shape as well as express and mediate conflict."

The political champion is bound to make some enemies in the process. Barry Rosen, the former director of the Milwaukee Public Museum, who took the museum private in 1992, told us:

"You make a lot of enemies when you do this, and you don’t get them back just because you’re successful.
You’re not going to be the most beloved human being in the world. But I wouldn’t let it stop me. I was obstinate."

Lastly, successful leadership in streamlining government requires vision. A coherent vision consists not only a concept of a desired outcome, but a workable framework for achieving that outcome. Opponents of change — within government, the legislature, and among special interests — almost always will prevail over a political champion who lacks vision. You can’t beat something with nothing.

The successful leader, says Tom Peters, should be a "cheerleader, enthusiast, nurturer of champions, hero finder, wanderer, coach, builder and dramatist." Leaders persuade. They change people’s beliefs about what is possible — and about what is desirable. They communicate a sense of urgency and purpose.

If politics is the art of the possible, the political champions must redefine what is possible. They must bring bold ideas to fruition. With visionary leadership, the "politically impossible" can become reality.

Strategy #2: Adopt a Comprehensive Approach

OK, let’s say you’ve decided to embark on a competition/privatization program. How do you get started? Well, how about announcing a pilot project in one of the departments and then see how you do? Sounds good, right?

Wrong. Such an approach likely will doom your competition program to failure before you even get started. Why? The opponents of privatization will all gang up on the one unlucky manager who happens to have the only privatization program in town. They will marshal all their firepower to kill or sabotage this project because they know if they can kill this they probably can kill the whole program.

Here’s a better way. Announce that you are launching a comprehensive competition program and that competition is to become a way of life in your government. You will start off with several projects in each of the major departments. Eventually, nearly all service the government delivers will be subject to competition.

This approach is far more likely to succeed. It does several things. First, it spreads out your enemies. They not only will have to kill numerous projects, but you force them to try to defeat the whole broad concept of competition.

Second, this approach democratizes the process. No one unit feels singled out and picked on. Everyone knows that they too eventually will have to compete.

Third, by putting projects out in every department, you have a better chance at achieving a ripple effect across government. This occurs when even in-house units not yet subject to privatization begin coming up with cost savings proposals in an effort to stave off contracting.

One last word. This all doesn’t mean you shouldn’t start up with the easier, low-hanging fruit. By all means you should, but you should do it within the context of a comprehensive approach.

[See City of Ft. Worth Embraces Privatization | City of Fresno Embraces Privatization]

Strategy #3: Don’t Study It to Death

Also known as "death by committee." This process gives the illusion of progress, then degenerates into an exercise in generating paper.

In summer 1992, Michigan created a commission to study privatization opportunities. By winter 1993, the state had introduced a process called PERM, by which every function in available every department would be reviewed, and a recommendation made to privatize, eliminate, retain or modify. For more than two years, this ambitious effort chugged along with little real impact.

The real progress that has occurred in Michigan has been the result of strong-willed individual administrators who have pushed for it.

The moral: Just do it! Spend some time putting together a sound Request for Proposals (RFP) that states precisely what outcomes you want (but leave inputs to the discretion of the contractor) and then see what you get back from the market.

Strategy #4: Create a High-Level Executive Position and Specialized Unit to Manage Outsourcing Relationships

The successful operation of a given government increasingly depends on being able to manage a network of service providers and market-based arrangements (vouchers, internal markets and public-private partnerships). Doing so effectively requires creating a new high-level position whose responsibilities include establishing, maintaining and cultivating outsourcing relationships. This individual would have experience in, or be trained in, the following:

• Identifying privatization opportunities and potential contractors;
  
  
• Overseeing the Request for Proposals (RFP) process;
  
  
• Evaluating vendor proposals;
  
  
• Managing outsourcing relationships; and
  
  
• Monitoring contractor performance.

These new government executives will have to handle a variety of complex issues and relationships like employee transitions; asset transfers; developing outcomes, performance goals, and penalties; terminations; dispute resolution; and risk management.

In addition, a centralized unit where a critical mass of knowledge about streamlining issues is set, should be established to manage the privatization process. Such a unit also would act as an institutional advocate for reform — publicizing and riding herd over departments that drag their feet.

Strategy #5: Uncouple the Purchaser and the Provider (Also Called The "Purchaser-Provider Split")

When the purchaser and provider are split, policy and regulatory functions are separated from service delivery and compliance functions and transformed into separate and distinct organizations (see Figure 1). Australia, Great Britain, and New Zealand all have embraced this reform (Great Britain has uncoupled three-fourths of its civil service, while in New Zealand the percentage is likely more than 90 percent).

Figure 1: Purchaser/Provider Split

The goal is to free policy advisors to advance policy options that are in the public’s best interest but may be contrary to the self interests of the department. For example, a central problem with government organizations is "agency capture." This refers to the tendency of service departments to capture the policy advice process from policy makers and top managers, using this power to recommend themselves as service providers and to bias policy advice towards increasing the size of their budgets. One example: a housing authority recommending staff and budget increases in order to build and manage more government housing.

Splitting policy functions from service delivery creates incentives for governments to become more discriminating consumers by also looking beyond government monopoly providers to a wide range of public and private providers.

In Victoria, Australia, the government has separated policy and delivery functions in the corrections department. The Correctional Services agency is now exclusively a service delivery agency. A separate entity called the Contract Administrator has been established to administer arms-length contracts with the private sector. The Contract Administrator is charged with "purchasing" correctional services and monitoring and evaluating the performance of private and public operators on a neutral basis. In this way, the government is creating a "market" for correctional services.

In Kansas, the agency that previously delivered child welfare services such as adoption and foster care, no longer delivers these services to Kansas children — it purchases them. The agency is almost exclusively a purchaser of services and contract monitor.

Uncoupling also is designed to reduce the conflicting objectives that arise when the same agency is involved in service delivery, regulation, and compliance — for example, the Federal Aviation Authority, which regulates airline safety while at the same time is charged by Congress with promoting low-price airline travel.

In New Zealand, agencies regulating transportation industries — airlines, railroads, trucking, and road safety — have been split off from the Transport Ministry into separate independent entities and put under private-sector boards of directors. Regulatory outputs are now "purchased" from each agency by the Transport Minister.

In Indianapolis, one department regulates businesses and residential dwellings and another is charged with eliminating unnecessary regulations. Similarly, an Enterprise Development group has as its sole mission to inject competition into government wherever possible and monitor public and private providers on an arms-length basis.

Strategy #6: Design Employee Adjustment Strategy

Privatization is a political process. Despite evidence of sizable cost savings, public officials often face strong opposition to privatization and competitive contracting. The greatest political opposition comes from public employees and their unions. Experience in the United States and overseas has demonstrated that making privatization attractive for impacted workers is vital to achieving the political support needed to implement competition strategies.

The best way to reduce opposition is to communicate to workers a commitment to fair treatment. Keeping employees informed can reduce antagonism and avoid the morale problems often associated with organizational change.

The cooperation of public workers is essential to a successful privatization program, and public officials should communicate a commitment to fair treatment for current employees. One of the principal reasons public employees are hostile to privatization is the perception that they will lose their jobs as a result of it. Fortunately, privatization need not be a hardship for public workers.

The most comprehensive evaluation of the effect of privatization on government workers was conducted in 1989 by the National Commission on Employment Policy (NCEP), a research arm of the U.S. Labor Department. The study, titled "The Long-Term Employment Implications of Privatization," examined 34 privatized city and county services in a variety of jurisdictions around the country. The report found that of the 2,213 government workers affected over a five-year period by the privatizations, only 7 percent were laid off. More than half the workers (58 percent) went to work for the private contractor; 24 percent of the workers were transferred to other government jobs, and 7 percent of workers retired. The study concluded that "in the majority of cases, cities and counties have done a commendable job of protecting the jobs of public employees."

These findings are similar to those of other studies examining job displacement from privatization. A 1985 General Accounting Office (GAO) study found that of the 9,650 defense employees affected by contracting out, 94 percent were placed in other wazzu government jobs or retired voluntarily from their positions. Of the 6 percent of displaced employees, half obtained jobs with the private contractor.

Recent large-scale privatization initiatives have demonstrated similar results. The city of Indianapolis has privatized 70 services over the course of the past five years, yet no public union workers have been laid off.

It also must be recognized that privatization is not a zero-sum equation — although the number of public jobs may decrease, jobs also are created in the private sector from privatization. Since launching its comprehensive competition program, for example, Indianapolis has experienced its most rapid private-sector job growth in decades.

There are a number of techniques to officials to insulate workers almost entirely from the potential of job loss. Techniques that can attenuate the impact on current workers include:

• Working Within the Attrition Rate: Perhaps the easiest method to reduce privatization of functions within the normal rate of attrition. Workers on a given function targeted for privatization are simply shifted to other government work, with staff reductions occurring only as employees retire.
  
  Government officials typically make a strong effort to provide for current public workers even when embarking on extensive privatization programs. Between 1982 and 1986, for example, Los Angeles County privatized functions that affected one of 1,300 workers, yet only 36 permanent employees were laid off due to the contracting out program (see Table 2).
  
  

  Table 2: Summary of Job Displacement Resulting from Los Angeles County Contracting, 1982-1986
  Classification	Number	% of Affected Workers
  Employees placed with county	1,061	80%
  Employees who left county service voluntarily	96	7%
  Employees placed with contractor	128	10%
  Employees laid off	36	3%
  Total affected employees	1,321	100%

  
  
  
• Consideration by Private Contractors: A common strategy to reduce current employee impact involves encouraging or requiring a contractor to offer first consideration for employment openings to all qualified public workers. Private contractors are usually quite happy to have access to an experienced labor pool. In adopting this policy, however, government officials should be careful not to constrain contractors with burdensome mandates.
  
  Public officials should avoid restrictions that mandate wage or benefit levels for contractors. Requiring private providers to match public sector wages and benefits in perpetuity can reduce the potential cost savings from privatization. Contractors should be allowed maximum flexibility to perform the given function in the most cost-effective fashion possible.
  
  
• Early Retirement Incentives: Given that privatization often entails a reduction in the overall labor force, another strategy for avoiding layoffs is enticing public workers to voluntarily leave government employment by offering them early retirement incentives. Such programs can be cost-effective if they enable governments to adopt otherwise politically unattainable cost-saving privatization measures. In cases when the vacated slots are left unfilled, early retirement programs can generally save money by reducing the government payroll.
  
  
• Letting Public Departments Bid on Contracts: Because it reduces opposition to privatization, allowing public-employee units to compete for contracts makes good political sense. It also makes good economic sense. Cost savings from privatization arise from the efficient operating practices that a competitive market promotes. The difference is not one of public vs. private, but of monopoly vs. competition.
  
  
• Structuring the Transition: For public employees that go to work for private contractors and for public departments that bid for contracts, the government can and should take steps to ease their transition into a competitive market. The change from a protected monopoly to a competitive environment can be accomplished more smoothly if public officials take steps to assist public workers.
  
  
• Training Assistance: One strategy to enhance the chances of successful bidding by public departments is to train the managers and workers in productivity, cost-saving strategies, and customer service. Workers and managers may require new skills to excel in a competitive environment. Training can provide them with the tools needed to make the transition as painlessly as possible, and increase the awareness of the need for continuous improvement and productive efficiency.
  
  
• Human Resource Strategies: As governments move to competitive contracting and providing public managers with more workforce flexibility, human resource departments will need to evolve. Rather than simply reacting to the changes in government and processing paperwork, human resource departments will need to become employee advocates — assisting employees with career paths and identifying new career opportunities within and outside of government.
  
  Human resource departments will have to take a more active role in the city’s long-term planning process and should be included from the beginning when devising privatization processes.
  
  Human resource agencies should take the lead in analyzing the government’s capability to absorb surplus workers from outsourced areas elsewhere within government. Among the variables that should be analyzed to assess absorption capacity are turnover statistics, feasibility of hiring freezes, rate of growth of workforce, pay scales relative to private-sector employment alternatives, availability of early-retirement incentive programs, professional capability of HR function, and quality of facilitating systems (e.g., job posting, outplacement agencies, etc.).
  
  
• Gain Sharing: In addition to providing managerial incentives for privatization, governments may want to consider sharing part of the savings from implementing privatization with department employees. Indianapolis structured gainsharing incentives for its public employees into most of its public-private competitions.

Conclusion

Privatization is a proven cost-effective technique for delivering public services. Nevertheless, due to political resistance from public employees and their unions, many governments fail to pursue privatization opportunities. The result: taxpayers are forced to pay more for services than would be necessary in a more competitive market.

This need not occur. By following the six strategies outlined in this chapter, California cities and counties can overcome bureaucratic inertia and the resistance of interest groups and successfully implement competitive government strategies.

Additional Resources

• Privatization: Lessons Learned by State and Local Governments, United States General Accounting Office, Washington, D.C., March 1997.
• Revitalizing our Cities: Perspectives from America's New Breed of Mayors, RPPI Policy Study #186, 1995.

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