An Elected Official’s Guide COMPETITIVE OPTIONS: … MANAGED COMPETITION TO PRIVATIZATION ... What is the role of the affected ... County, California; Tracy Sandoval, Auditor and

AnElected

Official’sGuide

COMPETITIVE OPTIONS:FROM MANAGEDCOMPETITION TO

PRIVATIZATION

Government Finance Officers Association

Copyright 2008 by theGovernment Finance Officers Associationof the United States and Canada

203 N. LaSalle Street, Suite 2700Chicago, IL 60601-1210

All rights reserved

The text of this publication, or any part, may not bereproduced without written permission from thepublisher.

Library of Congress Control Number: 2008939047ISBN 978-0-89125-299-3

Printed in the United States of America

CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . vii

iii

INTRODUCTION . . . . . . . . . . . . . . . . 1

What is alternative service delivery andcompetitive options?. . . . . . . . . . . . . . 1

Which services should be the government’sresponsibility to provide? . . . . . . . . . . . 2

What is the best method for delivering aservice to the public? . . . . . . . . . . . . . 3

COMPETITIVE OPTIONS AND MANAGEDCOMPETITION . . . . . . . . . . . . . . . . . 4

Why have governments chosen to usecompetitive options?. . . . . . . . . . . . . . 4

What are the common types of competitiveoptions? . . . . . . . . . . . . . . . . . . . . 5

What is managed competition and how doesit relate to alternative service delivery? . . . 7

Can all public services be subject tocompetitive options?. . . . . . . . . . . . . . 9

Why should governments considercompetition? . . . . . . . . . . . . . . . . . 10

EVALUATING COMPETITIVE OPTIONS . . 12

Are governments at a disadvantage duringthe competitive process? . . . . . . . . . . . 12

How have competitive options beenevaluated? . . . . . . . . . . . . . . . . . . 13

Does private production cost less? . . . . . 15

Does the evidence lead to a compelling casein favor of private production? . . . . . . . 17

What is the impact of competitive optionson service quality? . . . . . . . . . . . . . . 18

For more practical purposes, how cangovernments use recent studies tostructure competitive efforts? . . . . . . . . 19

iv

What is at risk? . . . . . . . . . . . . . . . 20

What criteria should governments use tojudge program and service deliveryarrangements? . . . . . . . . . . . . . . . . 23

STAKEHOLDERS, PUBLIC POLICY, ANDEMPLOYEE CONSIDERATIONS . . . . . . . 25

Who are the major stakeholders? . . . . . . 25

How do competitive options affect publicemployees? . . . . . . . . . . . . . . . . . . 26

Do competitive options result in layoffs? . . 27

What are the major concerns of organizedlabor? . . . . . . . . . . . . . . . . . . . . . 28

How do competitive options affectmanagement employees? . . . . . . . . . . 30

How do competitive options affect publicpolicy goals? . . . . . . . . . . . . . . . . . 31

What type of communication processshould be used with the governing body? . . 32

What type of communication processshould be used with the media? . . . . . . . 33

What type of communication processshould be used with labor unions? . . . . . 34

What strategies can be used to managehuman resource issues? . . . . . . . . . . . 36

Why might employees wish to work forprivate entities? . . . . . . . . . . . . . . . 37

DEVELOPING A COMPETITIVE OPTIONSSTRATEGY . . . . . . . . . . . . . . . . . . . 38

What are the major steps in developing acomprehensive service delivery strategy? . 38

What are the main steps used to evaluatea service for competitive options? . . . . . . 40

Who are the major stakeholders in theevaluation and implementation process? . . 43

Which government agency should overseethe evaluation process? . . . . . . . . . . . 44

What is the role of the affected departmentin the process? . . . . . . . . . . . . . . . . 45

v

Why should union leadership be providedthe opportunity to participate in theprocess? . . . . . . . . . . . . . . . . . . . . 47

Are there benefits in using outsideexpertise? . . . . . . . . . . . . . . . . . . . 48

Which services are good candidates formanaged competition? . . . . . . . . . . . . 49

What are the major steps involved indeveloping a managed competition process? 51

Who are the main government staffinvolved in the contracting process? . . . . 58

THE RFP PROCESS AND COST ANALYSIS. 60

What is an RFP? . . . . . . . . . . . . . . . 60

Which agency should manage the RFP? . . 61

Is a consultant needed to develop the RFP? 62

What are the major elements of an RFP?. . 64

How specific should the RFP be? . . . . . . 65

How long should vendors be given torespond to the RFP? . . . . . . . . . . . . . 66

What are the major proposal evaluationcriteria? . . . . . . . . . . . . . . . . . . . . 67

What are the major cost factors? . . . . . . 68

How should costs be analyzed? . . . . . . . 70

Should indirect costs be examined? . . . . . 72

PROCUREMENT AND CONTRACTING . . . 74

How should assumptions be analyzed? . . . 74

Should vendors be allowed to change theirbid during the contracting process? . . . . . 76

How would this process work under amanaged competition strategy? . . . . . . . 77

What is the optimal duration of thecontract? . . . . . . . . . . . . . . . . . . . 80

What is the objective of the contractingprocess? . . . . . . . . . . . . . . . . . . . . 82

What are the major elements of thecontracting process? . . . . . . . . . . . . . 83

What is a parallel negotiation strategy? . . 85

vi

What is a statement of work and howshould it be developed? . . . . . . . . . . . 87

Should performance criteria be put intothe contract? How should these bedeveloped? . . . . . . . . . . . . . . . . . . 88

APPENDIX A: BIBLIOGRAPHY . . . . . . . 90

FOREWORD

Elected officials and administrators are chargedwith the responsibility of effectively and effi-ciently delivering public programs and providingservices to citizens. Under the pressures of taxlimitations, fiscal strains, and stakeholders’ in-creasing demands, this task poses a perennialchallenge to government agencies as citizenexpectations for service quality continue toincrease as expectations on price continue todecrease.

State, provincial, and local governments are pre-sented with a variety of competitive options thatprovide fiscal management and alternative ser-vice delivery tools capable of meeting demandsfor more services, at a lower cost, and of a higherquality. Yet, the use of innovations in financing,managing, and delivering services cannot be ap-plied in every case. Mayors, governors, and legis-lators must follow a diligent path when consider-ing alternative service delivery options.

This Elected Official’s Guide presents an intro-duction to the use of competition in program andservice delivery. The Government Finance Offi-cers Association (GFOA) is deeply indebted toRowan Miranda, former Director of the GFOAResearch and Consulting Center (RCC), for hiswork on earlier GFOA projects in this area, andfor providing valuable guidance and the neces-sary framework during the early stages of manu-script development. The GFOA appreciates theefforts of RCC staff Barry McMeekin, SeniorManager, and Morgan Shipley, Associate Man-ager, for finalizing the manuscript and settingforth a balanced presentation of tools and strate-gies that public officials are using to reinventgovernment throughout the United States andCanada.

Targeting elected officials and public administra-tors, the book details the managerial perspectiveof managed competition and provides useful

vii

guiding principles and recommendations to prac-titioners. It reviews the theory and evidence onwhy involving the private or nonprofit sectorsmay lower costs or improve the quality of servicedelivery. Yet the book also highlights the condi-tions under which it may be preferable for ser-vices to be produced through public agencies anddescribes the questions that must be answeredprior to introducing competition.

Presented in a concise question-and-answer for-mat, this book provides clear, understandableexplanations to common questions about incor-porating competition into alternative service de-livery decisions, and in doing so, develops a com-prehensive service delivery strategy that canrely on competition when there are benefits fromdoing so.

The GFOA gratefully acknowledges the valuablecontributions of the following individuals whoacted as reviewers and provided their profes-sional expertise to GFOA staff: Winston McColl,Director, Purchasing and Contracts, San DiegoCounty, California; Tracy Sandoval, Auditor andController, County of San Diego, California;Leonard Martin, City Manager, City of Carroll-ton, Texas; and Tom Guilfoy, Director of Competi-tion, City of Carrollton, Texas. The feedback andguidance of Anne Kinney, Director, GFOA Re-search and Consulting Center, helped clarify thefocus of this Guide. The previous research of for-mer GFOA intern Grace Gu was an invaluableasset.

Jeffrey L. EsserExecutive Director/CEOGovernment Finance Officers Association

viii

INTRODUCTION

What is alternative service deliveryand competitive options?

Responding to fiscal constraints, scarce resources,and demands for high-quality, low-cost servicesled government to search for alternative sourcesfor delivering vital public services. Alternativeservice delivery methods are competitive optionsthat present government with an innovative so-lution for restructuring the process of producingand delivering the services that citizens demandand expect. Without an exclusive example, alter-native service delivery includes public, private,and shared delivery options. This Guide exploresand highlights the basic concept of competitiveoptions, the utilization of competition to deter-mine the best type of service delivery, and a pro-gram for developing and monitoring this process.

1

Which services should be thegovernment’s responsibility toprovide?

Governments choose to pursue competitive op-tions in order to improve the delivery of publicservices when situations dictate that changemay be necessary. It is vitally important thatparticipatory governments properly inventorytheir own ability to produce and deliver a servicebefore determining which services may be candi-dates for alternative methods. Not all govern-ments will choose to pursue alternative servicedelivery, and others will choose competitive op-tions for specific services. Through this process,governments can adequately determine whichservices should remain restricted to public deliv-ery methods. Such considerations are unique toeach government, but may include regulatoryagencies, policy-making bodies, police, and deci-sions and tools regarding economic development.

2 A N E L E C T E D O F F I C I A L’ S G U I D E

What is the best method fordelivering a service to the public?

Each government assesses its own ability in or-der to evaluate the best means for properly deliv-ering a public service. Answers may relate to theinitial question regarding government responsi-bility or may lead governments to seek solutionsfrom outside participants. Key considerations in-clude: which services are citizens willing to pur-chase directly in the marketplace or producethemselves, and are citizens really willing to payfor services that they demand? These questionsare recurring ones for the political leadership ofmost state and local governments and help shapethe competitive process.

C O M P E T I T I V E O P T I O N S 3

COMPETITIVE OPTIONSAND MANAGEDCOMPETITION

Why have governments chosen touse competitive options?

Governments pursue competitive options ulti-mately to provide the best service, at the bestprice, for their citizenry. This decision oftenstems from dissatisfaction with current operat-ing results or the need to compare the results ofcurrent in-house services with those provided bythe private sector. Cost savings, improved ser-vice quality, need to meet regulatory require-ments, inability to retain qualified in-house ser-vice providers, desire to get out of non-core busi-nesses to focus resources on core business, raisefunds for other needs, and inability to raise suffi-cient capital for needed system improvements allmotivate the search for competitive options.


What are the common types ofcompetitive options?

Privatization

Privatization generally refers to increasing therole of the private sector in the delivery of publicservices. In its most extreme form, privatizationinvolves load shedding—government getting en-tirely out of the business of financing and pro-ducing a service. The term contracting out is aspecific form of privatization that relies on deliv-ering a service through a third-party contractor(also called outsourcing). In much of the discus-sion that follows, the term privatization isequated with contracting out and outsourcing be-cause that is the main form of privatization usedin the United States and Canada.

Leasing

Franchises are licenses and agreements betweengovernments and private firms to produce ser-vices within a particular geographic area. Theprincipal role of government under this arrange-ment is a regulatory one—ensuring that firmsmeet specific price and quality criteria.

Examples of franchises include electric power,taxi service, cable TV services, ambulance ser-vices, solid waste collection, and even recre-ational facilities such as golf courses. Franchisescan be exclusive (e.g., a single producer of a ser-vice) or non-exclusive (e.g., multiple producers).Public utilities are often arranged on the basis ofexclusive franchises. Ambulance services are ar-ranged on the basis of a non-exclusive franchise.Non-exclusive franchises are often favored be-cause they promote price competition amongfirms and correspondingly increase citizenchoices.

Outsourcing

Contracting out has a long history in state andlocal government and remains the most likely


form of privatization. In its early use, it was lim-ited to specialized areas such as legal and insur-ance services. Surveys by the InternationalCity/County Management Association (ICMA)show that over the last several decades, the useof contracting out has extended to nearly everyservice that a local government provides and itremains the most popular alternative to govern-ment production.1

Governments generally pay contractors on alump-sum basis and expect them to follow spe-cific standards that determine the level andquality of a service. The two basic types of pay-ment schemes are fixed-price contracts and con-tractor cost agreements. Under fixed price con-tracts, contractors agree to deliver services of aspecific quantity and quality for a set price andcost overruns are to be absorbed by the contrac-tor. Cost contracts are used as a last resort be-cause governments are expected to assume mostof the risks. Under this arrangement, contractorslack incentives to reduce costs. Governmentsmust undertake audits to verify that only theagreed-upon costs are included in the pricing. Ifthe incentive structure “rewards” firms based oncosts, firms might seek to invest excessively incapital equipment, for example, to boost profits.


1. R. Miranda and K. Andersen, “Alternative Service Deliv-ery in Local Government, 1982-1992,” The Municipal Year-book 1994 (Washington, DC: ICMA Press, 1994), 26-35.

What is managed competition andhow does it relate to alternativeservice delivery?

Managed competition is a specific process withinalternative service delivery that requires govern-ment agencies to periodically compete with theprivate sector to produce public services at thehighest quality and lowest costs. The “managed”aspect refers to government continuing to main-tain an active oversight role to ensure that theservice is satisfactorily provided whether it isdone internally or externally. The “competition”aspect reflects the belief that the public or pri-vate characteristics of the producer are less im-portant than the extent of competition in serviceproduction. The end result is not privatization oroutsourcing, but ensuring competitive service de-livery. Thus, not all forms of privatization recog-nize (as does managed competition) that the sim-ple and militant transfer of a service from a pub-lic monopoly to a private one is unlikely to yieldimprovements in either quality or cost savings.2

Managed competition is the hallmark of thereinvention efforts of several large cities—Char-lotte, Indianapolis, Milwaukee, Phoenix, Phila-delphia, Los Angeles, and San Diego—whosemayors and managers have received national at-tention for their work. Some jurisdictions alsouse the term “competitive contracting” to de-scribe managed competition.

Managed competition is a special case of con-tracting out. Under managed competition, theprocess of “tendering” is used to subject govern-ment bureaus to competition by requiring themto bid on the service at the same time that theprivate sector is submitting bids. In theory, afterthe bid process is complete, it is possible for thegovernment to retain the entire service in-house,have a split or joint arrangement where some ofthe service is produced internally and the restthrough one or more vendors, or private firmsmay be used to produce the entire service withno governmental involvement.


2. Ibid.

Managed competition may be superior to otheralternative service delivery arrangements forseveral reasons. First, it provides governmentemployees and managers with a yardstick to im-prove their performance by comparing internalcosts to external bid submissions. Second, itgrants government agencies an opportunity tocompete—simple and militant privatization doesnot. Third, it lowers the risk facing public man-agers and citizens who may otherwise be justi-fied in their fears of service disruption. Fourth,in instances where collusion may occur, it islikely to be better if government retains somerole in service production so that it can expandits role if private-sector prices get too high. Fifth,through competitive bidding, the process offerscitizens the best-value procurement choice. Andsixth, managed competition helps break down in-ternal silos that contribute to non-competitivepricing of user department services.


Can all public services be subject tocompetitive options?

Decisions to pursue competitive options are notuniversal. Rather, officials must proactively de-termine the government’s suitability for changesin service delivery and recognize that decisionsrelated to public service delivery can have impor-tant consequences for their citizens’ quality oflife.

Unfortunately, no simple format exists for decid-ing on public service delivery. Presumably, anygovernment service that is also available in theprivate sector could be a candidate for competi-tive bidding. Yet such conditions do not lead un-equivocally to the conclusion that competitive op-tions present the best choice for changes in ser-vice delivery. In general, when consideringservice delivery options and the possibility of in-troducing competitive bidding into the process,governments should consider the effect on publicpolicy goals and initiatives, the effect on futurecompetition, the ability to maintain critical pub-lic services, and the support of stakeholders andthe public.


Why should governments considercompetition?

Governments consider competition for severalreasons:

(1) Overall cost reduction is one of the mostpressing reasons why governments consideralternatives service delivery. Governmentsmay issue a request for proposals (RFP) tothe private sector to obtain competitive bids.Bidders have an incentive to keep costs aslow as possible in an effort to win. Some pri-vate firms may benefit from economies ofscale that are difficult for the public sector toattain. For example, a multi-national refusecollection firm may be able to invest in theresearch and development of leading-edgeequipment and technology when a city de-partment simply cannot.

(2) A reduction in labor costs is another reasongovernments consider alternative service de-livery arrangements. Municipal unionizationrates have increased in the United Stateswhile private-sector unionization rates havedecreased. Powerful unions seek higherwages, benefits, and better working stan-dards while politicians may be pressured tomeet union demands in an effort to win polit-ical support. The culmination of piecemealclauses in labor contracts as a result of nego-tiation and arbitration may lead to contractconditions that increase the overall cost ofservice production.

(3) The opportunity to increase revenue withoutincreasing cost might motivate governmentsto consider competition. Governments mayallow third parties to provide services in aneffort to increase revenue. In an age wherepoliticians routinely take “no new taxes”pledges, they may deplete less political capi-tal by allowing third parties to charge andset rates to cover the cost of services. Privatethird parties may also simply be better at


collecting revenue than government agen-cies.

(4) Quality and customer service can be the di-rect result of competition. When firms areoperating on a cost efficient basis, consumerslook to other differentiators such as qualityin their choices. A private firm that mustperiodically win the business based on costand performance may have a greater incen-tive for quality and customer service than apublic “monopoly” agency.

(5) Lack of in-house expertise and capacity arefactors to consider when outsourcing, espe-cially in relatively new areas such as infor-mation technology management. Govern-ments have difficulty maintaining a payscale that is as responsive to market condi-tions for “hot skills” such as technology. Also,the quantity of work for a particular skillmay be intermittent (e.g., upgrade of a soft-ware product every 18 months). Govern-ments may also have difficulty buildingcapacity to respond to program demands oflegislative or oversight bodies or may beill-equipped to deliver short-term services.

(6) Maintaining a focus on core business may beanother reason to consider alternatives topublic production. Over time, governmentsfind themselves operating all kinds of pro-grams that have little do with their centralmission. Management may wish to focus oncore services—effective police patrol, for ex-ample—and let third parties provide supportservices such as photocopying or fleet man-agement. Does a city really need its own tele-vision station? By narrowing the focus ofwhat they have to manage, it is possible thatgovernments will do a better job.


EVALUATINGCOMPETITIVE OPTIONS

Are governments at a disadvantageduring the competitive process?

Governments choose to pursue competitive op-tions in order to secure the best service at thebest cost for all stakeholders. Often such deci-sions introduce a competitive environment to af-fected business units for the first time. Such anenvironment does not necessarily lead to a disad-vantage for the government provider or lead di-rectly to outsourcing and job cuts. Rather, as abusiness unit within a public entity, affected ser-vice providers often have a significant competi-tive advantage due to pricing that does not in-clude taxes or emphasis on profit, and an in-creased ability to borrow money for capitalacquisition much cheaper than the private sec-tor. As a result, although private service provid-ers carry a perception of being better managedand more equipped to compete, being part of anon-profit, public-first government providesinternal service providers with a strong base tocompete.


How have competitive options beenevaluated?

Studies on competitive options, specifically pri-vatization, have examined a broad range of ser-vices. One of the most popular services examinedis refuse collection. Other services include prop-erty tax assessment, electric utilities, schooltransportation, hospitals, wastewater treatment,police services, fire prevention, welfare services,and computer networks. This list is by no meanscomprehensive.3 Also, most of the studies havefocused on cost (efficiency), not effectiveness andquality. Consequently, when evaluating services,governments should set meaningful performancemeasures and targets in advance of pursuingcompetitive options. By doing so, benchmarkscan be developed and compared against externalexamples, internal services, current outsourcedservices, private examples, or proposed services.

As a result, it is difficult to get a definitive evalu-ation answer from available studies. Some stud-ies compare franchises with municipal agencies,while others compare contract and direct munici-pal production. Some compare a single servicewithin one city (e.g., municipal versus contractorproduction of janitorial services in two publicbuildings) while other studies make multi-ser-


3. See M. Allen, “Privatization Study Finds Potential forCity Savings,” San Diego Business Journal 28, no. 38 (Sep-tember 17, 2007): 23-23, 1/8p; S. Atkinson and R. Halvorsen,“The Relative Efficiency of Public and Private Firms in aRegulated Environment: The Case of U.S. Electric Utilities,”Journal of Public Economics 20 (1986): 281-94; D. Davies,“The Efficiency of Public Versus Private Firms: The Case ofAustralia’s Two Airlines,” Journal of Law and Economics 14(1971): 149-65; R. Hellman, Government Competition in theElectric Utility Industry (New York: Praeger, 1972): J. Hilke,Competition in Government- Financed Services (Westport,Connecticut: Quorum Books, 1992); K. Kosar, “Privatizationand the Federal Government: An Introduction,” CRS Reportfor Congress Order Code RL33777 (December 28, 2006); E.Morlok and F. Moseley, “Potential Savings from CompetitiveContracting of Bus Transit,” Report R-UP9951-86-1 (Univer-sity of Pennsylvania Civil Engineering Department, April1986); G. Siegel, “Where Are We on Local Government Ser-vice Contracting?” Public Productivity & Management Re-view 22, no. 3 (March 1999): 365-388.

vice/cross-city comparisons. Some scholars havecarefully examined the literature and attemptedto draw some general conclusions.

A recent review of the literature on the effective-ness of contracting out sought to assess the esti-mates of savings reported in studies. Some 135studies were found that reported cost savingsfrom contracting to the private sector. The aver-age value of costs saving was about 14 percent.In studies where one government contracted toanother (e.g., intergovernmental agreement),savings levels of 22 percent were found. Al-though this type of review has its limita-tions—namely, that it does not separate sophisti-cated studies from simple ones—it does showthat contracting is found to be associated withlower costs in many instances.4 But governmentswishing to contract out a specific service shouldseek to find out how other governments havefared that have contracted the service.


4. G. Hodge, “Reviewing the Effectiveness of Privatization asEnterprise Sales,” Privatization: An International Review ofPerformance (Melbourne: Westview Press, 2000), 98.

Does private production cost less?

Numerous studies on refuse collection, such asthe work by Berenyi,5 Berenyi and Stevens,6

Kemper and Quigley,7 McDavid,8 and Stevensand Savas9 are all consistent with the argumentthat contracting out public services costs lessthan public production. Berenyi and Stevensnote that the differences between the privateand public sectors can be attributed to personneland equipment management practices. Contrac-tors tended to use younger, less tenured workers,who received shorter vacation leaves and lowerabsentee rates. Contractor organizations wereless labor intensive and had more direct controlover their manpower and equipment than gov-ernment.10 Savas states that these are more im-mediate causes and that the “ultimate cause isthe absence of competition; when a governmentagency performs the work directly it acts as amonopoly.”11

The most sophisticated of the studies, oneswhich controls for scale, service levels, technol-ogy, and environmental factors, find that publicproduction is approximately 35 percent morecostly than contract collection, although a rangefrom 14 to 124 percent is reported.12 Further, thecost differential in favor of private contractingincreases once one takes into account fees andtaxes paid by contractors to localities with whichthey contract. Thus, the most sophisticated stud-


5. Eileen B. Berenyi, “Contracting Out Refuse Collection:The Nature and Impact of Change,” The Urban Interest 3(1981): 30-42.6. E. B. Berenyi and B. Stevens, “Does Privatization Work?:A Study of the Delivery of Eight Local Services,” State andLocal Government Review 20 (1988): 11-20.7. P. Kemper and J. Quigley, The Economics of Refuse Collec-tion (Cambridge, Mass: Ballinger Publishing Company,1976).8. J. C. McDavid, “The Canadian Experience with Privatiz-ing Residential Solid Waste Collections Services,” Public Ad-ministration Review vol. 45 (1985): 602-8.9. Stevens and Savas (1978).10. Berenyi and Stevens, “Does Privatization Work?”11. E. Savas, Privatization: The Key to Better Government(Chatham, New Jersey: Chatham House Publishers, 1987).12. Ibid.

ies comparing public and private production ofsolid-waste collection favor contracting outservice delivery.

An early study in this literature compared thecost to the City of Scottsdale, Arizona, of provid-ing fire services via private contract with thecost of municipal fire departments. The studyfound that municipal fire departments providedservices at costs between 39 and 88 percenthigher than contractors.13 A study on housingfound costs to be 20 percent higher, per constantquality housing unit, with municipal supply.14 Astudy of Lakewood Plan cities (i.e., a group of cit-ies known for contracting nearly all of their ser-vices) in California found budgets to be approxi-mately 20 percent lower than in non-Lakewoodcities.15 In an extensive review of comparisons ofprivate and public production of services in fivecountries, the authors summarized their findingsby stating that “privatization is cheaper thanproduction in publicly owned and managed firmsand given sufficient competition between publicand private producers . . . the differences in unitcost turn out to be insignificant.”16


13. R. Ahlbrandt, “Efficiency in the Provision of Fire Ser-vices,” Public Choice 16 (1973): 1-15.14. F. Muth, Public Housing: An Economic Evaluation(Washington, D.C.: 1973). Cited in T. Borcherding, W.Pommerehne, and F. Schneider, “Comparing the Efficiency ofPrivate and Public Production: The Evidence from FiveCountries,” Journal of Economics supplement 2 (1982):127-56.15. R. Deacon, “The Expenditure Effects of Alternative Pub-lic Supply Institutions,” Public Choice 34, 3-2 (1979): 381-97.16. Borcherding, Pommerehne, and Schneider, “Comparingthe Efficiency of Private and Public Production,” 127-56.

Does the evidence lead to acompelling case in favor of privateproduction?

In The Privatization Decision, the author’s anal-ysis of privatization studies concludes that “Pub-lic versus private matters, but competitive versusnoncompetitive usually matters more.”17 A goodcase for how managed competition might work isdescribed in a famous study on railroads. Thestudy compared the performance and profitabil-ity of the Canadian National Railroad to the Ca-nadian Pacific Railroad. When the Canadian Na-tional Railroad enjoyed price protection for along period of time, deregulation led to competi-tion between the two railroads that substantiallynarrowed the differences in productivity to thepoint where the government company becamemarginally more productive.18


17. J. Donahue, The Privatization Decision: Public Ends, Pri-vate Means (New York: BasicBooks, 1989).18. D. Caves and L. Christensen, “The Relative Efficiency ofPublic and Private Firms in a Competitive Environment: TheCase of Canadian Railroads,” Journal of Political Economy88 (1980): 958-76.

What is the impact of competitiveoptions on service quality?

Critics of competitive options argue that privatefirms emphasize the bottom line more than pub-lic organizations and that this focus reduces thequality of service provided by private firms.Quality is difficult to measure for most organiza-tions internally; these measurement problemsbecome more difficult when comparing across or-ganizations. To the extent there is evidence, itsuggests that quality differences are minimal. Ina careful analysis of ten cities, one study foundthat overall service effectiveness did not sufferas a result of privatization and in some cases itimproved.19 In another study of 20 cities in theLos Angeles area, the investigators found thatquality differences between private firms andgovernment bureaus for eight services were sta-tistically insignificant.20

To adequately measure quality impact, govern-ments can utilize the resources at hand. Includeservice experts with experience in the implemen-tation, delivery, and monitoring of the serviceunder consideration. These service experts pro-vide insight unique to the government and helpidentify certain quality markers and sources ofimpact; for example, relevant regulations gov-erning the service, or policy issues such as select-ing the lowest responsible bid, choosing aminority vendor, or creating local employment.


19. Berenyi, “Contracting Out Refuse Collection,” 30-42.20. Berenyi and Stevens, “Does Privatization Work?” 11-20.

For more practical purposes, howcan governments use recent studiesto structure competitive efforts?

The major limitations in competitive optionsstudies stem from cost and quality measurementand the ability to generalize from specific studiesto findings that might apply to state and localgovernment as a whole. Governments seeking toconsider competitive options and/or managedcompetition should not use a single study or agroup of studies as a projection of the successthey might have. Instead, government staffshould try and understand the causal model forwhy costs were purported to be lower or higherand use this information in their decision pro-cess accordingly.

These studies do not represent means to an end,but provide benchmarks, lessons learned, andpossible cost and quality comparisons. In struc-turing competitive efforts, governments mustremain diligent to risks associated with openingthe service to competition, namely low-balling.Private vendors may engage in loss leaders inorder to gain entry into new market. While suchefforts may lead to advantages both for the cityand the private vendor, using available reports,examples, and cost/savings data to make costestimates may lead to incomplete costs and inac-curate savings potential. Such conclusions ulti-mately affect the contract, implementation, totalcosts, and estimated savings potential.


What is at risk?

The decision to move forward with competitiveoptions is accompanied by foreseeable and unex-pected risks. To successfully implement a com-petitive process requires that governments prop-erly acknowledge risk and incorporate a riskmanagement system into any alternative servicedelivery initiative. Changes in delivery methodspresent government with an overarching servicedelivery risk. As mentioned in the sections onquality and cost studies, no conclusive evidenceexists concerning the end results of competitiveoptions initiatives. Maintaining service qualityand estimating cost and savings potential arenot guaranteed. Results may vary, and imple-mentation may lead to success, continuation ofcurrent standards, or failure.

As a result, initial risk assessments should an-swer the obvious risk question: is the service un-der consideration a proper candidate for alterna-tive service delivery options? Or stated differ-ently, is the service under consideration betterserved by the government? The risk associatedwith this initial question is the ability and/or in-ability of the government to determine the suit-ability of the service, and what the governmentgains, loses, or sacrifices by pursuing alternativeservice delivery options. This question allowsgovernments to analyze the major risk associ-ated with changing service delivery methods:service interruption. The most common goal as-sociated with changes in service delivery is to de-liver a service at an acceptable level of qualitywhile decreasing cost. Intuitive to this decision isthe maintained delivery of the service; when pur-suing a managed competition project, govern-ment must remain diligent both to the process athand, the continued delivery of the service, andthe seamless implementation of new deliverymethods without any interruption of the service.

To achieve the stated goals of pursuing a compet-itive approach, governments must properly iden-tify services that exist within a competitive mar-ketplace and establish processes to create a level


playing field. To implement a program and invitevendors in a marketplace without real competi-tion means that the incentives to keep costsdown and quality high are forfeited. Moreover, ifthe process fails in producing a level playingfield, the government risks losing the advan-tages introduced through competition. Conse-quently, a general risk is the inability to properlyidentify services within a competitive environ-ment and the resulting likelihood of using im-proper benchmarks to estimate the level of com-petition and the propensity for savings.

Related directly to the risk of competition is theability to determine full-cost estimates and ac-counting. Determining the service’s actual costprovides the government with the benchmarkand evaluation necessary to determine the mostcost-efficient service provider. Without properlycalculating costs, governments may lose the abil-ity to properly estimate costs, which may lead toproblems in implementation and contract adher-ence.

The stated goal of risk management should be toprevent, avoid, or mitigate risk in order to pro-tect the financial stability, stated goals, and con-tinued delivery of the service. Governments musttake a total view of presentable risks and at-tempt to plan for unforeseen risks to better as-sess, evaluate, and assign priorities in order toselect the best approaches for managing thoserisks. Such detailed plans also present govern-ment with insight into the suitability of the ser-vice under consideration. If the risk is too high,it may be wise to consider competitive options forother services.

For standard risks such as workers’ compensa-tion or financial losses due to theft or foreseeabledisasters, government can use standard insur-ance to cover the risk. For risks outside plannedsolutions, the government should implement acommunication program to discuss solutionswith relevant parties and articulate responses toaffected stakeholders. Effective risk manage-ment programs include detailed monitoring andreporting mechanisms in order to properly as-sess the effects of competitive options, insure thecontinued delivery of the service, and maintain


accountability. Effective monitoring programsnot only review delivery of services, but reporton the status of the contract, and address thecontractual stipulations placed on the serviceprovider. The monitoring and reporting programshould be fully planned and detailed during thecontract phase by specifying the level of monitor-ing and reporting, addressing the responsibilitiesand tasks of the government and the service pro-vider, and outlining the information necessaryfrom the service provider.

Introducing competition into the delivery of pub-lic services presents significant risk to govern-ment. No “cookie cutter” approach to pursuingcompetitive options exists; easing the risks of im-plementing a competitive process requires gov-ernment to view all services and delivery meth-ods as different and establish programs aroundthe particular nature of each service. By identi-fying these risks and establishing responses,government can manage and assuage the poten-tial for risk and move forward with a competitiveprocess.


What criteria should governmentsuse to judge program and servicedelivery arrangements?

The topic of public-sector program and servicedelivery is an interesting one because govern-ments are judged both on the basis of ends andmeans. Getting consensus on ends—quality ser-vices and low costs—is sometimes less problem-atic than getting agreement on means. That is,citizens may want government to use the servicedelivery mechanism itself to pursue social goalssuch as job creation, contracts for minority anddisadvantaged business enterprises, or assis-tance to special populations such as seniors andyouth. These issues raise an important question:What criteria should service delivery mecha-nisms be focused on?

Some political scientists and economists have ar-gued that most governments use the criteria offiscal equivalence in organizing service delivery.Fiscal equivalence is a public finance criterionthat is met when citizens “get what they pay forand pay for what they get.” Financing specificservices through general taxation can reduce fis-cal equivalence and user fees can improve it.Though fiscal equivalence is only one criterion inthe decision to provide services, if public officialsignore it problems often result. As noted by theAdvisory Commission on IntergovernmentalRelations (ACIR):

Individuals are led to distort their own ex-pression of demand for local public goods,either by inflating their demands if othersare required to pay or by depressing theirdemands if they have to pay more thantheir share. A lack of fiscal equivalence un-dermines the community interest within aprovision unit and generates incentives forindividuals to try to improve their own lotat the expense of others, rather than by


joining with others to improve the welfareof the community.21

Thus, communities can lose residents throughout migration if policies reduce fiscal equiva-lence. If the political process supports the provi-sion of specific services, competition is one ave-nue that governments have toward promotingfiscal equivalence.

Developing comprehensive performance mea-sures from the start helps government evaluatethe adequacy of alternative service delivery.Establishing fiscal, quality, and performancebenchmarks creates accurate criteria that holdpublic-sector and private-sector service providersto the same performance standards. This processfacilitates the criteria used to judge program andservice suitability.


21. U.S. Advisory Commission on Intergovernmental Rela-tions, The Organization of Local Public Economies, A-109(Washington, D.C.: U.S. Advisory Commission on Intergov-ernmental Relations, 1987), 8.

STAKEHOLDERS,PUBLIC POLICY, ANDEMPLOYEECONSIDERATIONS

Who are the major stakeholders?

There are several major stakeholders in servicedelivery decisions. In the public sector, the mostimportant are citizens and taxpayers who makeresidential location decisions in part based onbundles of services and associated taxes in spe-cific communities. Inefficient service delivery orpoor quality can lead to migration of citizens toother communities. Businesses also face similarincentives as poor services (e.g., access to majortransit routes) or high taxes can affect their abil-ity to operate or compete. Municipal unions andemployees are also stakeholders as they maketheir livelihood by performing various tasks thatcomprise a service. Politicians and administra-tors also have a stake in service delivery becausethey are held accountable for government perfor-mance.

The primary responsibility of elected officials isto ensure that services desired by citizens are be-ing produced efficiently and effectively. Arguably,elected officials should care less about the pro-duction mechanism than the overall outcome.Economists would be quick to point out that hav-ing other goals such as social redistributionthrough the service delivery mechanism (e.g.,hiring more workers than needed to providesummer jobs) might be an expensive and ineffi-cient way to improve social welfare (i.e., more ef-ficient mechanisms for redistribution exist).


How do competitive options affectpublic employees?

Job security is undoubtedly the number one areaof concern for municipal employees when a com-petitive options measure arises. Although thereare numerous reasons for undertaking such ef-forts, including increased efficiencies and in-creased customer satisfaction, reducing costs isalmost always a major reason for introducingcompetitive options to a government service.Since labor costs, both wages and benefits, ac-count for the majority of spending on govern-ment provided services, any attempt to privatizethose services will result in decreased spendingon labor.

The idea of employee safety net programs suchas retraining, reassignment, and early retire-ment should be developed and made available toaffected employees early in the competitive pro-cess. Decreased employee morale that leads todecreased service performance is always a possi-bility when alternative service delivery is dis-cussed. Presenting alternatives to the employeespromotes positive labor relations and lessens em-ployee apprehension. Utilizing human resourceprofessionals to design and promote a compre-hensive set of employee programs should alwaystake place early in the competitive process.

During discussions of alternative service deliv-ery and managed competitive, employees arelikely to feel that they are being mistreated andcast off for the sake of reduced costs. There aremany long-time government employees who haveexpended considerable energy in providing pub-lic service. It is important that government treatthese employees fairly and show sensitivity to-ward their concerns. The government may seektheir opinion on service issues and oftentimes al-low them to compete for the right to deliver theservice.


Do competitive options result inlayoffs?

Although approved competitive options do not al-ways result in employee layoffs, the possibility ofjob loss exists whenever service delivery changesfrom public to private. The transition period be-tween public and private service delivery shouldbe utilized to make employee layoffs an option oflast resort. The adoption of a well thought outemployee displacement program tends to lessenthe effect on government employment and inmost cases can serve to totally eliminate theneed for employee layoffs.

In Indianapolis, an acknowledged nationalleader in managed competitive efforts, over sev-enty initiatives were launched between 1992 and1996 with an end result of zero employee layoffs.Although officials had promised that the processwould not result in employee layoffs, they stillneeded to devise a plan to absorb employees dis-placed by competitive options into other areas ofemployment. This was accomplished through amultitude of human resource initiatives includ-ing early retirements, hiring freezes, and em-ployee retraining programs all designed with theaim of locating displaced workers elsewhere inthe organization. These programs were the endresult of careful negotiations with labor repre-sentatives and tended to soften opposition to thecompetitive options program.

Studies done over the past ten years regardingemployee displacement from competitive optionsarrived at a general figure of between 5and 15percent of workforce reduction through layoffs.


What are the major concerns oforganized labor?

Despite the lessening role of organized labor inmany industries over the past twenty years,unionism still plays a dominant part in the pub-lic-sector service industry. Any attempt at turn-ing over public services to private industry ismet with great scorn from labor organizationswhose role is to protect the rights of employeescurrently providing the service.

Labor unions generally voice the concern thatcompetitive options initiatives are simply amechanism for lowering employee wages. Forlower skilled services such as landscaping main-tenance or janitorial service, employees in theprivate sector do tend to be paid less than theirpublic-sector counterparts. This disparity is usu-ally a direct result of the collective bargainingprocess that labor unions fiercely protect. Butmany studies have shown that the private sectorcan provide services at a reduced cost withoutlowering wages. This is especially true in higherskilled areas such as data processing and fleetmaintenance. This is usually because private-sector enterprises have more latitude with re-gards to other management issues.

Collective bargaining agreements address manyother management issues and labor unions haveserious concerns regarding these matters. Theseinclude issues such as scheduling, work rules,leave time, and other employee rights. As men-tioned above, the absence of many of these samerestrictions in the private sector usually servesto explain the outside vendor’s ability to improveperformance.

Because of labor union concerns, competitive op-tions have become a major point of negotiationduring the collective bargaining process. Laborunions usually try to negotiate a clause banningcompetitive efforts, while governments attemptto preserve competition by retaining the right toseek alternative service providers. The end re-


sult in the collective bargaining agreement isgenerally somewhere in between these two com-peting interests. In some cases, unions do secureclauses banning competitive options, usually inareas where they have power over the politicalprocess. Recently, collective bargaining agree-ments have included the right for workers to bepart of the competitive process. In order to com-pete, labor unions must be able to protect theabove concerns without hindering their ability tosubmit competitive proposals.


How do competitive options affectmanagement employees?

Management employees affected by competitiveoptions face many of the same issues that con-cern the employees they supervise. The transferof services from public to private provision willaffect job security, salary and benefits and, inturn, management morale. In the case of man-agement, the government and management em-ployees themselves should have a wider range ofoptions available during the competitive process.These options should be openly discussed. Inmost cases, management employees possess ex-tensive expertise and knowledge of the subjectfunction that will make them probable candi-dates for monitoring the contract provisions.Those with superior management skills canprobably become assets in other areas of the or-ganization. Those that cannot be moved to otherareas or utilized to monitor the contractor shouldbe afforded the same employment safety net pro-grams that are offered to municipal line employ-ees.


How do competitive options affectpublic policy goals?

Competitive decisions leading to the privatiza-tion of public services may have substantial im-pact on stated public policy goals and initiatives.Prior to competitive options initiatives, currentservice delivery processes may include provisionsaimed at realizing stated public policy ends, suchas conservation efforts, subsidies for develop-ment, or to create new community jobs. If intro-ducing competitive options negates the likeli-hood of realizing a desired end, pursuing servicedelivery alternatives may not be an option forthe government. In cases where the implementa-tion of a privatized service conflicts or impedes apublic policy issue, governments need to findmeans for responding to and overcoming suchconflict.

An effective transition period builds in consider-ations regarding public policy goals and recog-nizes the resulting conflicts that exist betweenstated goals and new, alternative service deliveryoptions. Possible responses include building stip-ulations into the service contract to maintain thepublic policy initiative, separating the goals fromthe service delivery alternative, and implement-ing new methods for effectively realizing a gov-ernment’s stated goals. Moreover, the competi-tive option effort may actually be a means forproducing the desired ends. Governments can in-sert contractual requirements, include subsidiesto increase competition, and add evaluation cri-teria that considers minority-owned contractorsor contractors that include equity in hiring stan-dards.


What type of communicationprocess should be used with thegoverning body?

Any legislative body whose constituents will beaffected by a change in mode of service deliveryshould be kept completely informed of the com-petitive process. This should be done regardlessof the governing body’s ability to vote on thematter itself. In many instances, a city councilwill have a vote on either the process itself or thecontractual arrangement that is the end result ofthe process. Legislative bodies tend to be quitewary of voting on arrangements for which theyhave been provided limited information.

It is a political reality that forces opposed tocompetitive options will try to slow down or stopthe process by lobbying members of the munici-pal legislative body. When the legislative body isnot updated regularly, stories of corruption andillegality that are generally nothing more thaninnuendo can easily gain credence. When under-taking a comprehensive service delivery evalua-tion strategy, it is good practice to provide thelegislative body with updated cost studies, per-formance measurements, and service effective-ness reports as they are released. It is a betterstrategy to solicit the opinions of the body and torequest that a member of the body take part inany committees that are empanelled to examineservice delivery.


What type of communicationprocess should be used with themedia?

Because competitive options constitute a majorchange in service delivery, it remains a contro-versial subject. News organizations can becounted on to take an interest in controversialmatters, especially when they apply to govern-ments. Any attempt to privatize services shouldbe left completely open to the local media. Al-though the media itself will determine whetheran initiative is newsworthy, open communica-tions from the onset will help dispel rumors of fa-voritism and corruption in the process.

Communications with the media should beginearly in the process before any formal proceduresare undertaken. The government, through itspublic information or press relations bureau,should provide local media outlets with news ofany formal program analyses, including coststudies and effectiveness measurements. Themedia should be given access to managementemployees or outside consultants involved withthe program analysis. Any complaints of poor orinefficient service will probably have alreadyreached the news media. The effect of any ser-vice analysis will be intensified if service prob-lems have already been publicized. If the newsmedia are made aware of the analysis and re-sults are reported to the public, the competitiveprocess is sure to receive increased taxpayer sup-port.


What type of communicationprocess should be used with laborunions?

In cases where competitive options will affect alabor union responsible for the employees thatprovide the service, communication should be es-tablished early in the process. The communica-tion should start with providing the affected un-ion with the detailed financial and operationalreasons for the competitive effort. Appropriatelabor relations employees should be brought intothe process to provide guidance concerning thecollective bargaining agreement in effect andwhat restrictions it places on alternative servicedelivery options. The government’s labor repre-sentatives should be aware of any notification re-quirements concerning competitive options thatare present in the agreement. Failure of a gov-ernment to be completely aware of its contrac-tual responsibilities to the labor involved in acompetitive effort can lead to both embarrassingand disastrous consequences as the process pro-ceeds.

Many times employee groups and labor repre-sentatives stridently oppose competitive options.After all, regardless of employee safety net pro-grams designed and offered by the government,alternative service delivery has an overall dimin-ishing effect on government employment. Evenin cases where the alternative service provider isunionized, there is usually a net changeover ofrepresentative responsibility. If the sole concernof labor unions is the well being of their mem-bers, early negotiations and open communicationof programs that will ease worker displacementwill aid in soliciting union consent.

All service evaluation reports prepared duringthe competitive process and presented to the un-ions must be able to be independently verified.These include cost analyses, performance mea-surements, and service assessments. Negotia-tions with labor unions are frequently stalled bythe appearance of conflicting numbers and dis-


puted reports. In some cases it may be cost-pro-hibitive to obtain independent verification of allanalyses. If reports cannot be independently ver-ified, then the assumptions they contain and theevaluation methods used should be clearly statedand made available to union representation.

In 1996, Allegheny County in Pennsylvania at-tempted to privatize two golf courses that hadbeen under government control for over fiftyyears. Although the initiative presented severaleconomic advantages to the government, includ-ing a significant capital investment into the im-provement of the infrastructure of the courses,the privatization effort became bogged down indisagreements over cost comparison numbers,especially indirect costs. The rancor and distrustbetween factions of the government and the la-bor unions representing affected employees ledto the initiative’s ultimate defeat. This occurreddespite the government’s assurance that the pri-vatization of the courses would have no net effecton overall union employment numbers.


What strategies can be used tomanage human resource issues?

When a government service is slated for an alter-native service delivery method, a concerted effortis required to assure that all human resource is-sues are effectively dealt with. The human re-sources division should be involved early in theprocess to begin devising strategies that willease the concerns of affected employees. This in-cludes detailing alternative job opportunitiesand programs that will be made available to af-fected employees, answering pension and benefitquestions that will arise during the process, andkeeping employees aware of developments asthey occur.

The failure to manage human resource issueseffectively can lead to extremely unfavorableconsequences during the competitive process. Agovernment that is perceived to be unfair in itsdealings with employees can be negatively por-trayed by the labor negotiation and politicalprocesses. There are several human resourcestrategies available to protect employees andprovide a smooth transition to private-sectorservice delivery. These include employee retrain-ing programs, employee reassignments, access toorganization and private job banks, voluntaryretirement programs, and employment accessguarantees within the privatization contract.The government should utilize all of these pro-cesses to protect employee rights during anycompetitive options venture.


Why might employees wish to workfor private entities?

In numerous cases of competitive options, gov-ernments have attempted to qualm the fears oforganized labor by creating right of first refusaland right to be interviewed clauses within thecontractual arrangement. These clauses guaran-tee employees about to be displaced by the pri-vate sector the ability to remain employed with,or at the very least gain an interview with, thegovernment contractor.

The change of service delivery from public to pri-vate is not always equivalent to lower salariesand decreased benefits. Contractual guaranteesprotecting the rights of government employeesalmost always lead to some employee changeoverbetween the public and private sector. For a vari-ety of reasons employees may wish to work forthe private contractor; some employees may rel-ish the challenge of a new opportunity, they mayhave felt constrained in their duties, or they maysimply enjoy the work and wish to continue theircareers.

In many private-sector organizations, excellentjob performance is rewarded with career ad-vancement. Because political favoritism and bu-reaucratic red tape do not constrict the privatesector, some public-sector employees have abetter chance at career advancement when a ser-vice is privatized.


DEVELOPING ACOMPETITIVE OPTIONSSTRATEGY

What are the major steps indeveloping a comprehensive servicedelivery strategy?

(1) Inventory and assessment of service deliveryresponsibility. In many instances, govern-ments do not know the totality of servicesthey provide. The first step to reexaminingservice delivery strategy is to identify andcreate an inventory of services, the level ofservice provision, and methods of delivery.The second step is to distinguish betweenservices delivered to citizens, services thataffect internal operations, and core compe-tencies that should remain within the pur-view and control of the government (i.e., elec-tions and regulatory bodies).

(2) Determine operational efficiency of select ser-vices. After the inventory is complete, selectservices should be analyzed to determinetheir current operational effectiveness. Thereare a variety of evaluation tools available todetermine the state of current services, in-cluding citizen complaints and surveys, coststudies, and performance reviews. Utilizingthese methods can provide the governmentwith useful information to focus service de-livery redesign efforts.

(3) Improve the current service or consider an al-ternative service delivery option. The perfor-mance of service assessments can identifyminor inefficiencies or structural problems.Such assessments therefore do not alwayslead to the conclusion that competitive op-tions are desirable. Often the governmentcan make changes ranging from new policiesand procedures to additional capital equip-


ment outlays that can increase service effi-ciency and effectiveness. It is also possiblethat a service without operation issues todaymay be one in which the private sector hassignificant production advantages. In eithercase, it is important management problemsnot be made the sole basis for deciding topursue competitive options.

(4) Determine the available service delivery op-tions. There are numerous ways to deliver aservice. Ambulance service can be producedby government agencies, through intergov-ernmental agencies, through private firms,or by non-profit hospitals. A comprehensivestrategy should attempt to identify the mostfeasible alternatives.

(5) Continuous monitoring of service delivery.Evaluating and determining service deliveryoptions should be a continuous process oncean overall strategy has been developed. Agovernment must ensure that its stated ser-vice objectives are being attained regardlessof whether the government or the privatesector is providing the service.


What are the main steps used toevaluate a service for competitiveoptions?

As part of a comprehensive service deliverystrategy, governments need to determine if a ser-vice can be provided more efficiently and effec-tively by the government or the private sector.The evaluation should include the followingsteps:

(1) Cost analysis. The most important step inthe evaluation is the performance of a com-plete and thorough cost analysis of the ser-vice that may be subject to competitive op-tions. A government cannot determine thebenefits of alternative service delivery with-out knowing the true costs of service provi-sion. This means that the service costs can-not simply be determined by looking at thebottom line costs of the activity in a line-itembudget. A thorough cost analysis takes intoaccount the direct costs of providing the ser-vice along with costs not borne by the entityresponsible for the service. These indirectcosts can include services provided by othergovernment departments such as custodialservices or fleet repair. They can also includeadministrative services such as data process-ing and payroll. Along with indirect coststhere are capital costs involved with mostgovernment services. Outlays for machineryand equipment and the associated capitalcosts must be accounted for in any cost anal-ysis. For true comparison purposes a govern-ment must determine which indirect costswill be lessened or eliminated by competitiveoptions along with how capital costs will beredirected. Although the competitive processmay eliminate most interdepartmental costsfor a certain service, administrative and cap-ital costs can be transferred, but not totallyeliminated. A thorough cost analysis will alsoinclude:


− Total cost of ownership for a service, whichhelps determine if it is cost effective to per-form capital investments in order to mod-ernize and be internally competitive, or ifthe cost, life-cycle, and upgrade of equip-ment makes it cost prohibitive to be compet-itive with the private sector; and a

− Basic cost allocation system, which developsa method for determining the cost of theservice provided to users. The system doesnot determine the service’s price, but whatit costs to actually provide the service in or-der to fully capture the total cost of servicedelivery. This reveals direct costs, indirectcosts, and overhead service costs, whichonce revealed, helps to reduce overhead de-mands, relates the interdependence of de-partments, and helps develop memorandaof understanding in relation to support ser-vices needed to deliver competitive services.

(2) Performance review. Cost is not the only fac-tor that should drive the service evaluationprocess. How well the government entity pro-vides service in comparison to cost shouldalso be considered in the evaluation process.If the government is providing an effectiveservice at a higher cost, attempts to changethe service may be met with citizen con-tempt, political infighting, and unfavorablepublicity. A well thought-out performance re-view process provides the government with agood measure of the current state of its ser-vice delivery capabilities.

Government performance measurement canbe a highly complex undertaking that in-volves significant data gathering, analysis,and technical modeling capabilities, whichcan be beyond the reach of many local gov-ernments. Entire books have been written onthe various means of judging governmentperformance. A government should deter-mine the complexity of its evaluation processby its own resource availability and financialposition. The desired result of any study,complex or simple, should be to inform thegovernment if it is providing satisfactory ser-vices.


In general, inputs such as miles of streetsswept or tons of litter removed or outcomessuch as overall street cleanliness can be usedto evaluate service performance. Most gov-ernment service departments have at least arudimentary means of tracking inputs andgathering statistics. Difficulty lies in evalu-ating outcomes. Usually customer satisfac-tion surveys or complaint reviews can beused to judge specific outcomes. Statisticalanalyses are also available to assess somegovernment outcomes. For example, avail-able crime statistics are sometimes used tojudge the success of various public safety ser-vice inputs such as streets patrolled and cita-tions issued.

There is no guaranteed right or wrong way toanalyze service performance. It is entirely upto the government to provide the means ofanalysis. In the competitive options process,it becomes more important to document themeasurement approach and the proceduresutilized to provide the assessment. By docu-menting the overall methods that it utilizedto assess the service, the government will beable to defend the results during the subse-quent competitive process.

(3) Industry and market analysis. To facilitatereview of service suitability, governmentsshould evaluate current market and industryforces. Such an evaluation helps determinethe degree of competition, levels of competi-tive pricing, and number of alternate provid-ers in the local market. Coupled with anevaluation of the level of financial strengthand stability of private-sector providers, thisindustry and market analysis will help gov-ernment assess its ability to deliver a serviceversus available options in the private sector.When matched against the cost analysis andperformance review, governments are betterpositioned to begin the discussion of if andhow competition could benefit public servicedelivery.


Who are the major stakeholders inthe evaluation and implementationprocess?

There are several major stakeholders in the pro-cess, particularly the citizens and taxpayers whowill ultimately be affected by the increased ordecreased level of services, which will be the endresult of competitive options. The government’spolitical representatives are ultimately responsi-ble for the services that are provided by that gov-ernment. Organization management, up to andincluding the executive-level officer, takes ongreat risk since the success or failure of any ser-vice delivery change will be attributed to theircommand. Employees will be greatly affectedsince the process has a direct effect on their jobsecurity. The labor unions that represent thoseemployees face a significant loss in representa-tive power when the employees they representare replaced by the private sector. The serviceperformance and the success of the process willultimately judge the private contractors. Failureto deliver improved services will not only affecttheir bottom-line, but because of the controver-sial nature of competitive options, any perceivedproblems will result in negative publicity fortheir enterprise.


Which government agency shouldoversee the evaluation process?

It is always advantageous to manage the serviceevaluation process above the user departmentlevel. The failure to separate the procurementfrom the provider functions will almost alwaysresult in complaints of unfairness and favorit-ism. The structure of the government will deter-mine the management of the evaluation process.Because introducing competition is usually anexecutive-level decision, an entity that reportsdirectly to that executive-level, such as a city orcounty management office or the office of budgetand finance, should be responsible for the evalu-ation process. These offices cannot only maintainan arms-length separation during the proceed-ings, they also have greater access to an all-en-compassing view of the subject service. This isadvantageous in both cost analysis and perfor-mance measurement.

Executive-level offices, because of their overallmanagement responsibilities and decision-mak-ing powers, can usually compel user-level de-partments to provide accurate information in atimely manner. This in turn serves to keep theprocess moving forward instead of becomingbogged down in the pursuit of information. Theseoffices are usually responsible for the labor man-agement and collective bargaining issues thattend to become a major stumbling block in anycompetitive options process. Union negotiatorslike to deal with management personnel that canrespond quickly to their issues without having toreceive answers from a higher authority.

The executive-level offices also have the greatestaccess to the news media, usually through a gov-ernment press relations officer or spokesperson.Since many of these initiatives prove to be news-worthy, being able to disseminate accurate infor-mation about the process becomes extremely im-portant.


What is the role of the affecteddepartment in the process?

Although it may not be wise to allow the affecteddepartment to manage the competitive process,the role of that department will still be substan-tial. The affected department will have extensiveknowledge of programmatic costs and outputs. Itshould also have the subject matter knowledgeavailable to judge the technical merit of the pro-posals. Failure to acknowledge the expertiseavailable in the user department can lead to mo-rale problems and, in some instances, deliberatesabotage of the process.

Most competitive options experts advocate a sep-aration between procurement and service provi-sion. They also promote a strong role for themanagement and employees of the governmentorganization that is currently responsible for theservice. The department responsible for the over-all management of the process has organiza-tion-wide access to information, but they usuallydo not have the day-to-day operational knowl-edge that is a by-product of service performance.The affected department should be able to pro-vide the expertise to develop the technical re-quirements of the procurement process. In anyprocurement process, proper specification devel-opment is key to ultimate success or failure. Byallowing the user department to play a role in re-quirement development, the specificationsshould be similar to the operational proceduresof the current service.

In many instances, the affected department isresponsible for monitoring the performance ofthe private-service contractor. Opinion varieswidely on the merits of this decision. Many gov-ernments create a centralized office outside ofthe affected department to monitor contract per-formance. This allows for an unbiased evaluationsince the centralized office does not have a stakein the operation itself. Success of this type ofmonitoring depends on well-documented contractperformance measurements and the availability


within the contract office of thorough knowledgeof the measurements. When the affected depart-ment is responsible for contract monitoring, anindependent managerial presence must be re-sponsible for evaluating performance. As statedbefore, technical knowledge of the service is in-herent in the user department and the ability touse that knowledge to provide a fair evaluationof contract performance must also be present.


Why should union leadership beprovided the opportunity toparticipate in the process?

Union leadership will often have great influenceover the success or failure of a municipal compet-itive options initiative. It influences not only thecollective bargaining process, but in many in-stances the actual political process. Since anyprivatization of public-sector services will greatlyaffect their rank-and-file, involving union lead-ers will demonstrate a fair process and establisha smooth transition if responsibility for the ser-vice does actually change hands. For this reason,it is often worthwhile to afford the union theability to take part in the competitive process. Aslong as the process is designed in a manner thatpromotes fair competition, private vendorsshould have little concern with the input of af-fected labor unions.

Many unions lack the technical knowledge to re-spond to detailed proposals. They also lack the fi-nancial resources to contract with professionalconsultants to formulate their responses. Sinceprivate concerns do possess both the technicalknowledge and funding ability, it is usually con-sidered equal treatment for the government tosecure consulting expertise for the affected un-ions.


Are there benefits in using outsideexpertise?

Throughout the competitive process, govern-ments may choose to hire outside experts to helpanalyze, structure, and evaluate alternative ser-vice delivery options. These outside consultantscan help government in a variety of ways by:

(1) Performing organizational assessments todetermine which services could be deliveredmore effectively;

(2) Providing an objective basis for looking atservice delivery alternatives and/or validatethe findings of the government;

(3) Performing operational checks to determinecandidates for managed competition;

(4) Helping the internal service provider to com-pete with the private sector;

(5) Reviewing proposals from both the publicand private service provider; and

(6) Effectively building a wall between the pri-vate candidate, the in-house candidate, andthe internal, government evaluation team.


Which services are good candidatesfor managed competition?

Governments often seek competitive options forservices that have posed managerial problems.For example, a service where union negotiationshave been especially contentious may appear tobe ideal for an alternative service deliverymethod. The elimination of short-term manage-ment problems is one of the weaker criteria onwhich to base a competitive options effort. In-stead, services that are good candidates for alter-native service delivery and managed competitionhave one or more of the following characteristics:

(1) Scope of the function can be clearly specified;

(2) There is extensive competition in the pro-ducer marketplace;

(3) Performance standards can be defined, mea-sured, and evaluated; and

(4) Costs of service are higher than private-sec-tor benchmarks.

As a specific process within procuring competi-tive options, managed competition may not besuitable in all instances. Some elected officialsuse the “yellow pages test” when decidingwhether to produce a service through govern-ment or to contract for it in the marketplace.Photocopying and printing services, for example,are readily available in the marketplace and ifthe same service can be obtained at a lower cost,the market alternative should be pursued. How-ever, in considering delivery options, govern-ments should not build service delivery consider-ations around proposed contractors’ options; anyinitiative should derive from the prevalence of acompetitive marketplace for the service underconsideration. A managed competition strat-egy—of letting the government compete againstthe private sector—is unlikely to be justified for“commodity” type services. Instead, managedcompetition is more applicable to services that


governments may well have an edge in but their“monopoly” status has led them to lag in effi-ciency and/or effectiveness compared to others inthe market. A managed competition initia-tive—where government employees and manag-ers submit bids along side private firms—canlead to improved quality and reduced costs.


What are the major steps involvedin developing a managedcompetition process?

A successfully implemented managed competi-tion program requires a detailed process thatsupports and properly sets the stage for competi-tion, accounts for all applicable changes, and in-corporates the concerns and roles of all affectedstakeholders. The steps involved are not uni-form, and should be repeated for each procure-ment process. Moreover, based on the steps be-low, governments should develop unique check-lists for the three general phases of managedcompetition: selecting competitive candidates,performing competition, and transitioning theservice and managing the process. To be a viableservice delivery option, managed competitionshould present a quality-consistent and cost-efficient alternative.

Managed Competition Steps

(1) Initiating managed competition: Determininggoals and establishing competition. Like anydecision concerning possible changes in ser-vice delivery, initiating a managed competi-tion solution begins by clarifying the reasonsfor pursuing this service delivery option.Through explaining the intended outcomes,it concludes by establishing the organiza-tional infrastructure necessary to support,implement, and oversee the process. Typi-cally, the overarching goal in managed com-petition is to demonstrate that a governmentrecognized and pursued all feasible optionsfor providing cost-effective, efficient, andquality-consistent service delivery options.This emphasis, and any auxiliary goals,should remain jurisdiction-specific, recogniz-ing the unique reasons for pursuing this pro-cess and moving forward with competitiveoptions efforts. Achieving these goals startsby creating a process for open and fair com-petition between private-sector service pro-


viders and in-house options. Governmentsmay consider various alternatives to achievea level playing field:

− Choosing to ignore the emphasis on faircompetition, concentrating solely on costand quality;

− Creating competitive neutrality insuringneither party has an advantage; or

− Developing a results-based approach wherecertain requirements may vary, but collec-tively the process produces fair competition.

A detailed communication plan articulatingthe goals to stakeholders accompanies thisstep and leads to decisions concerning the in-ternal, organizational infrastructure as-signed to manage the process and establishesgoal-specific performance targets. Typically,the CEO, rather than the operating depart-ment, oversees day-to-day management.Moreover, governments may choose to incor-porate oversight committees consisting of ex-ternal units to monitor the process and im-plementation. By engaging in a practiceknown as uncoupling, the process of creatinga firewall between the government pur-chaser group and the in-house service pro-vider, governments advance the legitimacyand fairness of the process.

(2a) Identifying services for competition. Afterthe goal-setting and management phase,step two develops a method for identifyingall available services in order to determinethe best mode of service delivery. In thisstep, each department/unit creates a detailedlist of services provided, describing the struc-ture, customers served, quantity, frequency,budgeted costs, and suitability of competitiveoptions for the specific service. To effectivelyrank service delivery options, a centralagency reviews these submitted service re-ports and initiates a preliminary assessmentof managed competition suitability. This pro-cess includes evaluation and prioritizationcriteria specific to the government and itscorresponding goals that at a minimum in-


clude: number of providers sufficient to en-sure competition; ability to specify serviceoutcomes; establishment and implementa-tion of performance measures and ability toevaluate results; low risk of service interrup-tion or poor performance; cost savings poten-tial; impact on employees; and potential forimprovement in service quality. It is essen-tial that the government develop a rankingsystem related directly to the goals outlinedin step one, set individual competitive pro-curement schedules for each service based onrankings, communicate the schedule broadlyto all affected stakeholders and plausibleproviders, and periodically review and up-date the service inventory list.

(2b) Competitive evaluation of internaloperations. After identifying services andmodes of delivery, each department shouldevaluate the suitability of internal opera-tions to compete with private-sector serviceproviders. Often this evaluation processleads to conclusions that the government’soperations are clearly competitive, makingthe need to move forward with full competi-tion meaningless and a wasteful exercise. In-troducing a competitive process should bringan advantage to the service under consider-ation; if the internal option leads to thegreatest benefit, it will not benefit from fur-ther competition.

(3) Preparing to compete. By establishing an in-ventory of services and determining a com-petitive procurement schedule, governmentsset the stage for the units involved, the “pur-chaser” and the “seller,” to begin the prepa-ration process. During this stage, the teamassigned to purchasing the service deter-mines the appropriate competitive strategy,work plan, and timetable. Throughout, thegovernment continues its diligence by notify-ing stakeholders, including project partici-pants and affected employees. Internal pur-chasing units may be permanent or uniqueto each procurement, but need to includesubject matter experts and individuals withexperience in costing, purchasing, and theservice under consideration. The purchasing


group formulates a competitive strategybased on the distinct characteristics of theservice to determine the type of competitiveoptions the government will pursue.

If the strategy calls for managed competi-tion, this phase concludes with the establish-ment of an internal proposal team. The pur-chasing group and proposal team form twoseparate processes with complete confidenti-ality. To effectively facilitate the competitiveprocess, the government must determine andspecify the level of support available to thein-house option, including available re-sources, amount of time allocated for prepar-ing a proposal and reviewing the process,and redesign considerations. The redesignprocess is not ad hoc; it concludes with de-tailed descriptions of the proposed changesand improvements, effects on staffing andwork processes, changes the provider teamwill request from internal support servicesprovided by other agencies within the gov-ernment, and associated costs resulting fromthe redesign. In responding to the demandsfor open and fair competition, allocating ade-quate resources and allowing time for possi-ble redesign increase the ability for thein-house provider to remain competitive.

(4) Conducting the procurement process. A man-aged competition procurement processshould remain consistent with the govern-ment’s rules and regulations regarding pro-curement while incorporating procedures toassure competitive fairness. Such proceduresinclude: confidentiality of all information;equal access to the same information at thesame time; standard performance measuresfor all proposers; full disclosure and equal-ization of competitive advantages/disadvan-tages as necessary; and development of a faircost comparison by including overhead costsin the internal proposal. Prior to the re-quests for proposals (RFP), the procurementteam uses requests for qualifications (RFQs)to pre-qualify prospects. This helps assessthe bidders’ qualifications and ability to pro-duce the service, and check available refer-ences. RFQs also present the prospective


providers with opportunities to offer feed-back regarding RFP components, such asreasonable and competitive fairness, whilehelping to insure that critical services re-main uninterrupted. Managed competitionRFPs follow typical government standards,detailing the scope of services, work to be ac-complished, and the desired outputs and/oroutcomes. The RFP should incorporate per-formance standards and indicators to assistproposers in understanding the standard ofwork required and facilitate the govern-ment’s development of monitoring and re-porting mechanisms. Please see page 60 for adetailed description of the RFP, stakeholdersinvolved, and description of key elements.

The procurement process concludes with anevaluation of all proposals, including ananalysis of costs and all technical factors,such as the proposed service provider's expe-rience, track record, quality of management,and stability of service. Analyzing total costsand savings is a critical aspect of managedcompetition. A thorough, accurate, andwell-documented process should govern thiseffort. When analyzing costs, governmentsmust remain diligent to the direct costs, pro-posed prices, and any additional direct andindirect costs or savings a government en-counters when changing the mode of servicedelivery. It is important to properly gaugeand analyze the costs prepared by the inter-nal provider, as this price becomes the basisfor budgeting the service and cost monitoringif the government awards the in-house pro-vider. An analysis of in-house costs considersthe full cost of the internal service deliveryand avoidable costs incurred. A thorough costevaluation also accounts for the total cost ofshifting to an outside service provider, in-cluding the price proposed by the privatevendor, costs avoided by outsourcing, andnew costs or savings associated with makingthe transition to a private-sector service pro-vider.

(5) Transition, implementation, and contract ad-ministration. While technically the last step,considerations regarding the transition pe-


riod, the implementation process, and con-tract administration should start early in or-der to build related requirements into theRFP and properly estimate costs. Transitionplanning responds to the effects of change onall affected employees. To smooth this pro-cess, governments need to review all affectedemployees for changes in status (i.e., trans-fers, layoffs, retirement), changes in benefitstatus, and incorporate training and/oroutplacement services. Including the HR de-partment, payroll/labor relations office, andaffected unions eases this transition periodand helps identify all areas involved in em-ployee transition. Managed competition alsoaffects the status of assets, which may beused by, transferred, or sold to the new pro-vider. Asset transition entails an inventory ofcapital assets including documentation ofcondition, deficiencies, needed repairs, andcurrent value. Governments should also re-spond to the impact on other agencies as ser-vice delivery changes likely affect other ser-vice delivery methods, the quality of services,revenues, expenditures, and budgets.

Contract administration essentially starts byassigning accountability, day-to-day monitor-ing, financial management, and performancereporting responsibilities to an assignedindividual or team. Contract administrationbegins in the RFP stage and continuesthroughout contract negotiations. Initial ef-forts consist of establishing monitoring stan-dards, techniques, and schedules consistentwith contract terms; clarifying expectations;and introducing systems for educating theservice provider and stakeholders on expec-tations. The group or individual responsiblefor contract administration develops and uti-lizes appropriate feedback mechanisms toreport on customer satisfaction, fulfill all re-porting requirements, and supply regularcontract performance reports to the govern-ment and affected stakeholders. The contractshould specify the service producer’s report-ing requirements and appropriate accessrights to records consistent with the RFP, thecontract, and applicable laws; introduce ac-countability measures by function for report-


ing, records maintenance, and project man-agement; enact regular reporting schedules;and institute a public access system forrecords.


Who are the main government staffinvolved in the contracting process?

There are four distinct governmental roles in thecontracting process: specification development,procurement, legal analysis, and contract man-agement. Depending on the organization, theseroles may be performed by one department, fourseparate departments, or a combination of de-partments. In general, the department that is re-sponsible for providing the service in questionshould have some, if not all the responsibility forspecification development. Since it has providedand may continue to provide some form of theservice, it should be able to provide the perfor-mance variables, characteristics, and measure-ments that any prospective vendor will need todevelop an effective and knowledgeable servicedelivery proposal.

The government purchasing office usually han-dles the actual procurement of an alternativeservice delivery method. Purchasing officialsmay also be intimately involved in specificationdevelopment, but since they usually have vastknowledge of the government procurement poli-cies and procedures, the job of assuring thatthose policies and procedures are followed istheir responsibility.

A number of departments should take part in thenegotiation process, including the legal depart-ment, purchasing, budget, and the departmentresponsible for project management. All of thesedepartments possess specific knowledge and ex-pertise that help protect the government fromentering into contracts that are overly beneficialto the private-sector contractor.

Finally, the government has to determine the de-partment that will be responsible for contractmonitoring. The citizens are protected in anycompetitive options process when adequate andknowledgeable staff is assigned to make surethat the services that are paid for are deliveredproperly and according to the contract specifica-


tions. The contract monitoring duties are usuallyassigned to employees of a formal contract man-agement office or to the user department. Inmany instances, government controller orauditor personnel may also monitor contractperformance.


THE RFP PROCESS ANDCOST ANALYSIS

What is an RFP?

A request for proposals (RFP) is a competitivenegotiated bid process that applies several eval-uation criteria to a procurement in addition tooverall cost. The criteria may include technicalfactors, such as the ability to perform and priorexperience, and responsibility factors, such ascompany financial status and financial capacityto perform. Because cost is only one variable inthe overall evaluation process, an RFP is moreflexible than a government formal lowest bidprocess, which usually awards the contract tothe lowest responsible bidder.

An RFP is similar to the more formal bid processin that prospective vendors must respond to de-tailed specifications. The specifications, alongwith other criteria, are usually rated using apre-defined scoring system that includes a scoreper criteria along with a relevant weighting fac-tor for each criterion. Usually an evaluationteam consisting of managers and other employ-ees that possess considerable knowledge of thesubject function are assigned the task of ratingthe proposals.

The RFP evaluation process is usually a phasedprocess in which vendors are eliminated by spe-cific factors at key evaluation points. This is gen-erally referred to as shortlisting and gives thegovernment the ability to further scrutinize pro-posals considered to be competitive after beingjudged against the designed criteria. Those ven-dors whose proposals are considered competitiveafter preliminary evaluation are usually asked tofurther clarify cost and other issues. This flexi-bility in the process allows the government tonegotiate the best overall deal for the subjectoffering.


Which agency should manage theRFP?

Since government structures vary, determiningwhich agency manages an RFP process canchange from project to project. Because the useof competitive options has become so common,many governments have formalized offices tooversee RFPs that change the nature of servicedelivery. In many cases, they may be housedwithin the government’s purchasing, legal, orbudget divisions, but in others they may reportdirectly to the executive level of the local govern-ment.

It is almost always advantageous to separateprocurement from provision and for this reasonthe department affected by the change of servicedelivery should be utilized for technical needsand specification development, but not to overseethe entire RFP process.


Is a consultant needed to developthe RFP?

The need for consultants in the RFP process isdependent upon the level of expertise availablewithin the organization. This can mean both le-gal expertise and familiarity and experience withthe service or operation being procured. In nu-merous instances the organization developing anRFP may be seeking a potential replacement forin-house provision of the service. In that case, itis quite possible that the expertise for developingthe RFP exists in the department currently re-sponsible for the service. It is also possible thatthe requisite knowledge is available from the or-ganization’s purchasing specialists. It is impor-tant to remember that operational experience isnot always equivalent to technical knowledgewhen it comes to designing procurement specifi-cations. The procuring organization needs to de-termine on a case-by-case basis if the technicalknowledge is available in either the user depart-ment or the purchasing office.

For some service procurements which are lack-ing in technical complexity—such as pest con-trol, custodial, and landscaping services—thereis a wealth of information available bothin-house and on the open market to aid in thedevelopment of fairly detailed RFP specifica-tions. The user department or purchasing agentwithout the help of outside consultants can usu-ally develop specifications for these types ofprocurements.

Quite a few RFPs are utilized to obtain highlytechnical and complex services such as engineer-ing design and data processing management.Many governments do not possess the level of ex-pertise and technical knowledge to write specifi-cations for these highly detailed disciplines.There is usually an abundance of consultingfirms that possess this type of technical expertiseand have vast experience available in the prepa-ration of documents for complex procurements. Itis preferable for the government to utilize out-


side expertise as opposed to taking the chance offormulating flawed specifications.

It should always be remembered that the use ofconsultants for development of specifications forany procurement does not relinquish govern-ment from management of the entire procure-ment process. A contract manager from withinthe organization will need to provide oversight ofthe process and act as a quality control agent.This can mean everything from signing off on de-liverable documents to authorizing payment forservices rendered. The legal authority and re-strictions of the government must also be upheldand followed. This is usually the responsibility ofthe government’s legal personnel. The evaluationof proposals and award of contracts is always thegoverning body's responsibility. Managementpersonnel or their designees should carry outthese functions.


What are the major elements of anRFP?

Although the actual structure of an RFP may bedictated by the complexity of the service or func-tion being procured, any RFP should contain thefollowing basic elements:

• Introduction. An introductory section detailinga high-level summary of the project scope andthe background and history of the service orfunction that is being procured.

• General conditions. This section usually de-tails the housekeeping functions of the processsuch as scheduling restrictions, submission re-quirements, formatting, required references,insurance provisions, and other terms andconditions.

• Contract requirements. Details the overallconditions necessary in any subsequent nego-tiated agreement. This section can includeeverything from process controls, vendor per-formance issues, warranty claims and accep-tance, and payment signoff requirements.

• Technical requirements. These are the detailedspecifications to which the contractor willhave to conform. Performance criteria and theactual description of the service to be providedshould be completely stipulated within thissection.

• Evaluation methods. A description of the ac-tual rating methods of the subject procure-ment. This includes the criteria on which theproposal will be evaluated, and an explanationof the actual evaluation process.

• Legal appendix. This section should containdocuments such as required insurance,right-to-work papers, disadvantaged businessforms, and other legal prerequisite papers thatwill need to be included with the proposals.


How specific should the RFP be?

Drafting specifications for any proposal for ser-vice delivery is not an easy proposition. On theone hand, it is imperative that the technical spe-cifics are precisely detailed. If there is no specificdetail, the proposal evaluation process becomesconfused and monitoring performance after con-tract award will be extremely difficult. On theother hand, overly specific proposal standardstend to limit competition and can be construedas being favorable to larger vendors.

In general, an RFP should concentrate on theoutcomes that an alternative service procure-ment seeks. Utilizing this type of approach freesthe interested parties to utilize their best busi-ness practices to pursue innovative and cost-ef-fective solutions. Mandating how the private sec-tor should do the job tends to repress creativityand lead to the same inefficiencies that are in-herent in the public-sector operation.

When soliciting proposals for solid waste ser-vices, the specified outcome may be removal ofrefuse and recyclables from each residence oncea week. This allows the vendors the ability to usetheir industry knowledge to propose an efficientmeans of providing the service. Narrowing thespecifications to include the routes and equip-ment a contractor must use to provide the ser-vice tends to strap the contractor with the sameinefficiencies of the public sector. The govern-ment may have to set some restrictions on thecontractor such as hours of operation, but it stillgives the contractor procedural latitude.

This is not to say that the contractor can be al-lowed to operate indiscriminately without somegovernment restraint. A government that needsa bridge designed should not be expected to so-licit proposals with the specification of a de-signed bridge and nothing else. Obviously thereare significant standards and codes to which thecontractor must adhere. Public safety will al-ways overshadow the contractor’s ease ofoperation.


How long should vendors be givento respond to the RFP?

The proposal’s technical complexity will some-times be a factor in the response time afforded toprospective vendors. However, four to six weeksseems to be a reasonable guideline that can befollowed in affixing a response time to mostRFPs. Assigning a shorter time period will oftenlimit the number and quality of the responsesbecause some vendors may be limited in thenumber of staff available to process and createproposal responses. A response time longer thansix weeks will obviously elongate the process andmay add to the complexity of the responses re-ceived. The government’s legal and purchasingdivisions should be able to establish if there areany statutory regulations involved with time-frames for proposal responses.


What are the major proposalevaluation criteria?

Although proposal evaluation criteria canchange depending on the service or activity pro-posed for competitive options, several criteriaare relatively common for evaluation purposes.These include the overall quality of the proposal,contractor qualifications and experience, techni-cal merit of the proposal, financial stability ofthe proposer, and the responsiveness of the pro-posal to the instructions and conditions of theRFP. Often the basis for a fair evaluation relieson a weighting system that uses the importanceattached to each criterion by the officials respon-sible for the procurement.

It is important to understand that the evaluationof proposals is subjective. Government employ-ees that are chosen to evaluate proposal criteriashould have explicit knowledge of the service orfunction that is being procured. It is advanta-geous to document and clarify the evaluation cri-teria in a formal plan so that the evaluationteam has specific guidelines available to judgethe proposals.


What are the major cost factors?

There are several cost factors involved with acompetitive procurement. A government shouldidentify the following cost factors to analyze thetrue costs of competitive options:

• Procurement costs. There are transaction costsinvolved with a competitive procurement.These include the costs of specification design,whether the design is done in-house by theservice or purchasing department or con-tracted to an outside consultant. There arealso the legal costs of the bid process itself, in-cluding advertisement and contract negotia-tion.

• Technical proposal costs. This is the negotiatedfinal cost of the contract for the service beingprivatized.

• Contract monitoring costs. After an agreementis formalized, the government is responsiblefor contract management and the costs associ-ated with monitoring should be calculated.

• Alternative employment costs. Most govern-ments provide several programs to employeesthat are displaced by competitive options. Thecosts involved with these human resourcestrategies that need to be assessed. A govern-ment that guarantees no layoffs may have tocreate additional positions to accommodatedisplaced employees. Early retirement and jobretraining programs result in additional coststo the government and should be added to thetotal cost of a competitive options initiative.

• Unavoidable costs. Even if the competitiveprocess leads to a private-sector provider,there are certain unavoidable costs that gov-ernments incur by introducing managed com-petition. These remaining overhead costs arethe costs previously allocated to the operatingbusiness unit, but now dispersed to other costcenters due to competitive options. Examplesinclude salaries of executive management, au-dit costs, accounts payable, insurance and lia-


bility, legal, pension obligation bonds, andoversight costs. This is not an exhaustive listand governments that choose alternative ser-vice delivery methods need to inventory thefull range of unavoidable costs and where/howthese costs are transferred.


How should costs be analyzed?

Analyzing the costs of alternative service deliv-ery initiatives is highly dependent on the govern-ment’s budgetary structure. Assessing servicecosts from a traditional departmental line-itembudget is difficult because many costs aretracked across divisions rather than beingtracked to the specific activity or function underconsideration for competitive options. In largeand medium public works budgets, costs aresometimes assigned by the organization’s geo-graphical breakdown and not by the specific ac-tivities that they undertake. Several publicworks activities can be competitively bid: potholepatching, roadside vegetation control, and snowremoval, for example. But tracking costs at thecost center level does not facilitate cost compari-son by specific activity. Many governments uti-lize activity based costing or outcome budgetingto provide a more functional cost assessment.

Activity based costing is an analysis tool that al-lows governments to calculate the specific costsof the services they provide. Direct departmentalspending for wage and salary, equipment, sup-plies, and materials are allocated to the specificoutputs of departmental activity. Some govern-ments utilize sophisticated information systemssuch as materials management systems and la-bor tracking systems to track costs to specific ac-tivities. Governments that do not have access tothese types of systems may require paper-basedtracking to show how materials are used andwhat activities employees undertake. Other gov-ernments allocate these costs by predeterminedpercentages. No matter which type of trackingsystem is utilized, there is some dependence ongovernment employees to provide accurate costs.The end product of each should be an accountingof the cost per specific output, such as the aver-age cost of a filled pothole. Once the governmenthas arrived at a reliable cost figure for publicservice provision, a cost comparison can be madeagainst the public service alternative. To providea true comparison the cost factors of the competi-tive option process must be analyzed.


Procurement costs and contract monitoring costsare public service costs and can usually be ana-lyzed in much the same way as activity costs.The deparment responsible for the various pro-grams needs to provide alternative employmentcosts; a combination of pension administratorsand budget officials should develop early retire-ment costs; and budget officials should deter-mine the costs of added positions. Other safetynet programs such as retraining should be avail-able from the human resource employeesresponsible for the design of the programs.

The technical procurement costs are the actualprices in the contractor proposal. There are sev-eral costing mechanisms that governments spec-ify when requesting proposals. These includefixed price, fixed price with escalator, and timeand materials contract pricing. Fixed fee simplymeans that the contractor proposes to providethe service for either a fixed total cost or a fixedunit of service cost. Fixed fee with escalator isthe same, but specifies negotiated price increasesat specified intervals. Time and materials pric-ing is usually utilized for building and repairservices and allows for set pricing for labor andmaterials used.

A prudent analysis of costs also factors in the po-tential for savings. By pursuing competitive op-tions, what costs are eliminated, increased, ortransferred to new units within the government?What is the difference between the total cost ofthe service and the actual, total amount saved ifthe service is terminated from the governmentledgers and completely contracted out? Includingfactors such as employee restructuring, re-hires,retirement, and training costs leads to a morecomplete and accurate picture of total costs,costs added or subtracted, and additional costsand/or savings from contracting out a service.

The end result of the above analyses should befirm costs that can provide a fair comparison be-tween public and private service delivery.


Should indirect costs be examined?

In order to have a fair alternative service deliv-ery process, the indirect costs (those costs notborne directly by the service-providing depart-ment) should be part of any evaluation thatseeks to provide a fair and open competition.Since indirect costing is an inexact discipline andnot all governments have the sophisticated fi-nancial management tools at their disposal tocompletely equate these costs, there are severalways in which they can be used in the analysis.

Many governments that lack the sophisticatedaccounting capabilities to track indirect costsutilize statistical percentage models to establishindirect cost figures. The statistical multipliersare usually obtained from indirect costing stud-ies performed by the budget office or, in somecases, by consulting firms. The figures obtainedby using these multipliers are usually adequatefor government financial reporting or overall de-partmental performance reviews. In the contextof competitive procurements, indirect costs de-rived from across-the-board modeling may notprovide a figure equitable to judge in-houseperformance against that of private competitors.

Numerous indirect costs need to be assigned tospecific government services. These include in-terdepartmental service costs such as fleet man-agement or building maintenance. The servicedepartment usually provides these costs bymeans of work order costing. Utility and spaceallocation are also indirect costs that need to beassessed to user departments. These are usuallyallocated by space measurements, such as thesquare footage percentage assigned to a user de-partment. Administrative costs such as payrollprocessing and purchasing are also costs of doingbusiness. These are usually allocated by usagestatistics, such as number of employees orrequisitions processed.

Many governmental activities are heavily de-pendent upon access to capital equipment (e.g.,vehicles, heavy equipment, computers, etc). The


cost of the capital used to purchase equipmentshould be a part of any service cost analysis.These figures are usually available from budget-ary personnel and should be included in anyservice cost analysis.


PROCUREMENT ANDCONTRACTING

How should assumptions beanalyzed?

In any procurement of private-sector services,the proposing vendors will include certain as-sumptions concerning the government and theservice in both the proposal and the contract.These assumptions are usually general issuesthat the vendor would like to clarify before sign-ing an agreement. The assumptions will then be-come part of the contract and if they are not up-held or attained during service performance theymay become grounds for either contract sever-ance or litigation for damages. For this reason, itis imperative that the government study theseassumptions in detail for their impact on overallcost and effect on service delivery.

In many procurements of complex specializedservices, such as computer software implementa-tions and infrastructure engineering design, thevendor will assume a certain amount of govern-ment staff participation. This participation maybe significant and can include everything fromtesting and modeling to aiding in the project de-sign. Any government participation affects over-all project cost and may also affect the govern-ment’s ability to function. The governmentshould take into account the salary and benefitcosts of any employees needed for the contractedservice, along with any residual replacementcosts for the employees needed to attain thevendor assumption.

The vendor may also have assumptions concern-ing the payment structure (i.e., fixed fee, timeand materials, incentive based, etc). It is impera-tive that the government assess the various as-sumptions regarding payment structure to arriveat the method that presents them with the mostvalue. Other cost assumptions may need to be


analyzed, including, most importantly, theamount of capital investment the vendor as-sumes it will have to make. In capital intensiveservices such as garbage removal or street main-tenance, the vendor may assume that the gov-ernment will have equipment available alongwith capital needed for replacement or repair.All of these assumptions represent either cost orvalue to the government. If the vendor assumesthat the government will provide all equipment,then the overall cost of the service rises by theassociated bond fund costs of that equipment. Onthe other hand, if the vendor assumes that it willbe responsible for equipment and other capitalcosts, the overall value of the service packageshould increase by the cost of capital investment.


Should vendors be allowed tochange their bid during thecontracting process?

Governments should always strive for consis-tency throughout the procurement process. Avendor pre-proposal conference held between therelease of the RFP and the deadline date for pro-posal submission affords vendors the opportunityto question the RFP, the scope of services, andthe procurement process itself. Vendors may alsobe allowed to correct non-material errors oromissions in their proposals for a short period oftime following the actual submissions.

Situations arise that may call for resubmissionof certain facets of a proposal. Either a mistakein wording or a change in the actual scope of theservice may necessitate the need for updatedproposals. As long as all vendors are afforded anequal opportunity to update their proposals,these changes can be made. However, thechanges should always be requested in advancefrom the vendors. Vendors should never be ableto make unsolicited changes after the proposaldeadline date.

In the case of pricing, updated cost submissionsmay be solicited throughout the procurementprocess. The procuring government can continueto ask for new cost proposals usually up until thepoint where it solicits a best and final offer.


How would this process workunder a managed competitionstrategy?

The use of managed competition (the ability forthe public sector to compete with private enter-prise for government service contracts) hassteadily increased throughout the 1990s. As inany competitive procedure, an appearance offairness must be upheld in managed competitionto ensure that an adequate pool of private-sectorvendors stay committed to the process. Whenvendors sense that the process is being slantedto the public-sector entity, their only recourse isto object to the process or withdraw from thecompetition completely. Vendor objections to theprocess lead to costly legal procedures and courtdefenses. Vendor non-participation lessens com-petition, which invariably leads to higher servicecosts and inadequate service delivery.

To provide a level playing field between publicand private service delivery, procedures must beestablished and followed throughout the compet-itive process. A fair cost analysis as describedearlier should be performed and equitable per-formance measurements and service standardsneed to be instituted for both the public and pri-vate sector. There is a vast difference betweenthe methods of cost accounting for service deliv-ery that are utilized by the public and privatesectors. An independent and equitable compari-son process that sets standards for overhead cal-culations, capital accounting, and service assess-ment needs to be established in any managedcompetition. Once these standards have beendeveloped, the managed competition strategycan be initiated.

There are a number of different approaches to amanaged competition strategy. Governmentsmay use an ad-hoc approach where in-housecosts are informally compared to service costs ofsimilar private-sector vendors. These compari-sons can then be used as standards for improve-ment of the in-house department or as a means


to enter into a more formal competitive optionsprocess. The City of Lake Forest, Illinois, hasused this approach by utilizing an independentcommittee to compare the costs of in-house deliv-ery of solid waste services against those of anoutside service contractor in a comparable neigh-boring government. In the case of solid waste,the government found out that its in-house costswere significantly lower than those of the privatesector. The cost comparison process was success-ful enough to warrant its use on other govern-ment services.

Governments may also choose to utilize informalbidding as a managed competition strategy. Thisstrategy involves comparing the costs of in-houseservice provision against firm fixed costs of for-mal bids received from private vendors. In manycases, the comparison itself leads to increased ef-ficiency within the government department thatis competing for the service. It can also lead toacceptance of the formal bids that provide amore valuable service to the government. Alle-gheny County in Pennsylvania adopted thisstrategy in 1996 as a means of comparing nu-merous in-house service costs to those of the pri-vate sector. Although only one service (fleet man-agement) was ultimately privatized, the estab-lished benchmarks led to increased efficiencyand reduced costs in many other service deliveryareas.

Formal bidding can also be utilized as a man-aged competition strategy. Under formal bidding,the in-house department is required to follow thesame procedures as private-sector vendors. Itmust submit formal bids that include the fullcosts of service delivery. Many governments uti-lize outside auditors to ensure that the costs sub-mitted by the in-house department are valid. Ifthe in-house department ultimately prevails inthe competition, it is held to its submitted costproposal and penalized for any cost overruns. Aformal bidding, managed competition strategyhas been utilized with much success in govern-ments such as the City of Phoenix, Arizona, forsolid waste services; the State of Massachusettsfor various road maintenance and improvementprojects; and the City of Indianapolis, Indiana,for numerous service delivery functions.


Managed competition is a strategy that contin-ues to expand throughout the various levels ofgovernment. It has been proven over and overthat the strategy can work if all sides follow thesame rules and are held to the same perfor-mance requirements.


What is the optimal duration of thecontract?

Governments may procure contracts for numer-ous service activities, some simple in nature,while others are extremely complex. Because ofthe diverse nature of government service deliv-ery, it is hard to determine the optimal length forall governmental contracts. However, includingconsiderations designed to maintain and con-tinue the reasons for competition helps deter-mine the ultimate length of a service deliverycontract. There are usually statutory issues in-volved with acceptable contract lengths and insome areas, the use of long-term contracts maybe expressly forbidden. Government purchasingor legal officials should have first-hand knowl-edge of legalities concerning contract length.

In any service procurement it is beneficial to thegovernment to place minimal restrictions on theprivate sector and allow it to utilize its ability topropose innovation. Short-term contracts do notalways allow for innovative and cost-consciousproposals. Many times vendors may not have ac-cess to capital equipment necessary to providethe service. If there is a need for capital outlayby the vendor, a short-term contract tends to re-strict competition and drive up costs. Competi-tion is restricted because not all vendors haveexpensive capital equipment at their disposaland they are not able to risk expensive borrow-ing without a long-term agreement. Costs aredriven higher because vendors have a shorterperiod to repay capital loans and must set theirprices accordingly.

It is sometimes reasonable for governments toenter into shorter-term contracts that containextension or reauthorization clauses. In thesecases, governments agree to revisit the contractat certain periods and extend on the agreementof both parties. These types of contracts may alsocontain specific performance thresholds or avail-able appropriation criteria. Thus, vendors havesome guarantee that the agreement will be ex-


tended if their performance is satisfactory andthe government intends to continue funding theservice.


What is the objective of thecontracting process?

The main objective of the contracting processshould always be to provide the citizens with thefairest price for the most effective service. Main-taining a fair and open competition among asmany qualified vendors as possible almost al-ways ensures that the main objective will bemet. Because the government retains manage-ment control in the contract process, there areseveral measures that can be undertaken to en-sure that the objective is met.

The contracting process should guard againstcreating a private monopoly by way of the com-petitive process. Lack of competition may serveto eliminate a public monopoly and replace itwith a private monopoly. The main objective ofthe contracting process is to foster competition.Before entering into it, the government needs todetermine if there are enough vendors availableto guarantee competitive bidding. Determiningavailable competition can be as simple as search-ing through the local yellow pages or trade jour-nals. The purchasing office may be able toproduce a representative sampling of availablecompetition.


What are the major elements of thecontracting process?

There are several steps in the contracting pro-cess, starting with determining a clear purposefor the contract and the exact services that willneed to be performed. The contract should spellout the exact services that citizens are to receive,along with the results that the contract shouldproduce. It should also spell out activities that acontractor must assume to produce the desiredresults. The government must also decide themost effective means of producing an equitablecontract, determined between the bid processand the RFP approach. Along with determiningthe process, the government should specify thetype of pricing that the contractors will need topropose.

When all the purchasing issues have been deter-mined, the procurement element of the processbegins. This includes vendor clarifications, eval-uation of proposals, and contract negotiation. Itis important to maintain a fair contracting pro-cess. Prospective vendors should have equal ac-cess to all procurement information. They shouldalso have a clear knowledge of how proposal sub-missions will be evaluated. Those vendors elimi-nated during evaluations should have access tothe evaluation results. This will not only makethem aware of their deficiencies, it will fostercompetition for future procurements. Once ven-dors have been elevated for negotiations, it be-comes the responsibility of government officialsto obtain the most favorable terms and condi-tions. Negotiations should also result in a formalstatement of work that clearly defines the con-tractor’s responsibilities. Once a formal agree-ment has been reached, the contract should beformalized and brought before the governmentallegislative authority.

The final element of the contracting process iscontract management. The government contractofficer will need to monitor the contractor to af-firm that the contractor adheres to the scope of


work formalized in the negotiated statement ofwork. The contractor should also be monitoredfor adherence to specifications and performancemeasurement requirements. Non-performanceshould be recognized early and brought to thecontractor’s attention.

This process also holds true to government unitsthat won the right to provide city servicesthrough the competitive process. While largelysymbolic, requiring the internal service providerto sign a contract reflects its commitment to per-form at the level of service delivery promisedduring procurement or at the same level a pri-vate-sector provider would be held accountable.Such contracts also provide the basis for moni-toring the expectations and delivery of a serviceand create the basis for performance standardsand monitoring principles, which helps ensurethe process remain open, fair, and ultimatelycompetitive.


What is a parallel negotiationstrategy?

A parallel negotiation strategy is based on theprinciple that maintaining competition through-out the contract negotiation process should re-sult in the best deal for the government. An ef-fective negotiation strategy should fulfill the fol-lowing objectives:

(1) Mutual agreement between the governmentand the vendor on what services are beingpurchased and how those services will be de-livered;

(2) Negotiating the most effective services forthe lowest price;

(3) Developing service agreements that clearlydefine the long-term relationship betweenthe government and the vendor; and

(4) Selecting a single vendor that provides themost cost-effective services to the govern-ment.

Under parallel negotiations, the criteria devel-oped during the RFP process to grade the vari-ous proposals are evaluated to elevate two viablevendors. Because vendors make a significant in-vestment in the process, the government shouldonly elevate those vendors that provide a trulyfeasible service delivery option. When the gov-ernment has identified two viable vendor op-tions, a short period of time should be set asidefor each vendor to settle any remaining ques-tions they may have regarding the subject ser-vice. These “discovery sessions” should provide abasis for refining scope of services and cost pro-posals and aid in the development of a statementof work.

Once the scope of services has been clarified, thegovernment should begin the negotiation processwith the most suitable vendor while maintainingthe second vendor as a viable option. It is imper-ative that the government maintains a good


faith relationship with both vendors remainingin the competition. There are costs involved inany negotiation strategy and merely using an al-ternate vendor solely as a bargaining chip is notadvisable. It should be made clear from the onsetthat the second vendor is an option only afterclearly defined negotiation points have not beenattained. This will make it clear to the vendor ofchoice that negotiations will not be terminated inan arbitrary and capricious manner. This willalso assure that a fair but competitive process ismaintained up until a contract agreement isreached.


What is a statement of work andhow should it be developed?

A statement of work (SOW) is a document devel-oped during contract negotiations to specify theroles and responsibilities of both the governmentand the vendor. The SOW should clearly spellout what services are to be performed and howthey are to be delivered. The SOW should in-clude the specific technical criteria for which thevendor is responsible and how the criteria will beevaluated. The SOW should also define specificmaintenance and support plans for the serviceand provide the final cost and pricingmechanisms that the vendor is to utilize.

A functional SOW describes the work in terms ofwhat is to be performed without constraining thecontractor in how the work is to be performed. Itcontains quantifiable performance measure-ments such as quantity, quality, and timely ser-vice delivery. Because the SOW contains measur-able performance and management plans, itbecomes an important document for contractmanagement. The government should develop itscontract surveillance plans taking into consider-ation the performance requirements of the SOW.

Careful consideration of the defined SOW is aprerequisite of effective contract negotiations.Questions of what services are to be delivered,where, when, and how those services are to bedelivered should all be jointly agreed upon beforea final contract is established. These should allbe developed in conjunction with the price andvalue considerations that are the prime factors ofcontract negotiations. The government’s key mo-tivation during contract negotiations is to receivethe most cost-effective service delivery option. Amutually agreed-upon SOW that mandates ven-dor performance and defines the correspondingcosts is a valuable means of protecting the publicinterest. Because the SOW defines the scope ofthe contractor’s performance, it is frequentlyattached as an appendix to the overall serviceagreement.


Should performance criteria be putinto the contract? How should thesebe developed?

Performance criteria that can be easily moni-tored are an absolute necessity in most govern-ment service contracts. After a contract has beenawarded, the government has only delegatedprovision of the service, not management respon-sibility. Without fair but specific performancestandards there is no basis for determining if thecontractor is satisfying the contract terms.

It is important to begin developing performancestandards early in the service strategy processand to continue to refine them throughout devel-opment of the procurement RFP. Part of thecomprehensive strategy is to evaluate the perfor-mance of the service as it is provided by the gov-ernment. Those same performance measure-ments can be used as a starting point for devel-oping standards to be adopted into the contractdocument. Holding outside contractors to thesame performance standards by which thein-house service has been judged is a way toguarantee fairness in the overall process.

A number of different performance measure-ments are available to the contracting govern-ment. Citizen satisfaction is a key determinantin how an outside vendor is performing. The gov-ernment can adopt satisfaction survey measure-ments or complaint tracking mechanisms asmeans of monitoring vendor performance. Thegovernment can also develop service deliveryschedules with which the private vendor must bein compliance. The contract management teamcan then monitor the service to ensure that thevendor is adhering to the required schedules.The government can also build output and out-come measurements into the service deliverycontract. A street-cleaning contract, for example,may mandate a certain amount of streets perday as an output while monitoring the overallcleanliness of the streets as a specific outcome ofservice delivery.


Regardless of which performance standards agovernment chooses to utilize, the standardsshould always be measurable and specific. Aplan for monitoring those standards should alsobe developed and should include the vendor’s re-porting requirements, a service-assessmentmeeting schedule, complaint procedures, and thegovernment’s access rights to vendor records.


APPENDIX A

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