APPENDIX E
Contracting Out and Core Competencies

Since the earliest days of the Continental Congress, government has sought alternative organizational and procedural mechanisms for important support functions and policy instruments that are inherently commercial in nature. In the 1990s governments around the world initiated efforts to reduce their size and costs. Downsizing was accomplished but did not change the need for program delivery.

Sometimes the political pressures to get a program out of a government agency led to reliance on contractors. Sometimes having to produce a mandated service without an adequate in-house staff led government managers to hire contractors. Sometimes government officials have used contractors to escape ceilings (which did not apply to non-government workers) on the number of government employees. Sometimes contractors have received government work because studies have shown they could do the work better and cheaper, although contracting has spread far more quickly than such studies have been done. (Kettl 1996, 46)

State governments are exploring alternatives—especially contracting out—to the usual in-house provision of services. These alternatives often offer a chance to adopt modern business practices; streamline the organization; and rely on market mechanisms to improve quality, reduce costs, and become more responsive to constituencies. A major theme for change in government agencies is customer service, but critics have noted that government has citizens, not customers, and that



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The Workforce Challenge: Recruiting, Training, and Retaining Qualified Workers for Transportation and Transit agencies APPENDIX E Contracting Out and Core Competencies Since the earliest days of the Continental Congress, government has sought alternative organizational and procedural mechanisms for important support functions and policy instruments that are inherently commercial in nature. In the 1990s governments around the world initiated efforts to reduce their size and costs. Downsizing was accomplished but did not change the need for program delivery. Sometimes the political pressures to get a program out of a government agency led to reliance on contractors. Sometimes having to produce a mandated service without an adequate in-house staff led government managers to hire contractors. Sometimes government officials have used contractors to escape ceilings (which did not apply to non-government workers) on the number of government employees. Sometimes contractors have received government work because studies have shown they could do the work better and cheaper, although contracting has spread far more quickly than such studies have been done. (Kettl 1996, 46) State governments are exploring alternatives—especially contracting out—to the usual in-house provision of services. These alternatives often offer a chance to adopt modern business practices; streamline the organization; and rely on market mechanisms to improve quality, reduce costs, and become more responsive to constituencies. A major theme for change in government agencies is customer service, but critics have noted that government has citizens, not customers, and that

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The Workforce Challenge: Recruiting, Training, and Retaining Qualified Workers for Transportation and Transit agencies government cannot be run like a private company.1 Moreover, according to Camm and Moore (1997), these alternatives also involve risks such as the following: A catastrophic failure to perform (which can involve not only quality, performance, and cost issues but also the need to process the contract termination and to renegotiate with another contractor); Loss of real-time control, which is problematic under an uncertain operating environment; High transaction costs, especially those that are so subtle as to make it difficult to specify clearly what is needed; Inadequate investment in customized assets (providers will not make such investments unless they can get a positive return on them); and Loss of needed skills; an agency must provide aggressive oversight of the outsourcing activity and make certain that the activity is fully integrated with the agency’s planning, operation, and information systems. It may be cost-effective to keep a portion of an activity in-house to train managers who will oversee contract sources. Much of government’s current work, and even more of it in the future, is likely to be accomplished through a vast network of partnerships among government workers; private companies; nonprofit corporations; and federal, state, and local governments. Nevertheless, government is ultimately accountable to the public for its programs and for public expenditures. Government’s work requires a strong 1 Mintzberg (1996) notes that when efforts to privatize government activities are considered, it is important to remember that the underlying belief that the country’s interest is best served if government becomes more like business and U.S. citizens more like customers leaves out considerable depth in the relationship between the government and the citizens. Distinctions are made between inherently governmental activities and inherently commercial activities but do not cover a wide variety of legal issues involving Constitutional concerns such as First Amendment rights, procedural and substantive due process, sovereign immunity, and the separation of powers. The Supreme Court has argued that government cannot evade its obligations by simply resorting to the corporate form. This is important to transportation agencies that must seek and trade off efficiency versus equity and address service quality and fairness as well as distributional and financial concerns.

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The Workforce Challenge: Recruiting, Training, and Retaining Qualified Workers for Transportation and Transit agencies and competent technical core to ensure that government is a smart buyer of goods and services (Kettl 1993). Unfortunately, as government increasingly relies on contracting out and other forms of service delivery, it risks losing its in-house technical expertise. The erosion of technical capacity matters in several ways. First, government is presumed capable of carrying out the programs it creates. If it cannot assess the work of others, difficulties can quickly arise. Second, the bureaucracy is presumed capable of exercising the discretion that elected officials delegate to it. Such discretion requires technical expertise as well as management capabilities. Third, the government’s legitimacy in day-to-day operations often hinges on the presumption that government agencies are expert and use that expertise to guide their actions. Inevitably, contractors will encounter problems and issues that government managers will have to address. They need technical expertise to make intelligent judgments on the basis of available information. Government reliance on contractors changes how things get done and the relationships between all the participants involved in government service delivery. For example, reliance on contractors changes the relationship between government program managers and program outputs; instead of using their technical expertise to address program and project issues, program managers can find themselves dealing with the procedural features of contract monitoring and compliance. Thus, government workers can be doing jobs for which they were not trained, while their expertise goes unused. Contracting also changes the relationship between political appointees and the programs they are responsible for. The contracting system adds a link in the chain from policy making to policy execution. Program managers can be frustrated by their lack of leverage over contractors’ behavior and over the programs they are charged with managing. A link is also added to the programmatic connection between elected officials and citizens. Elected officials often lack an understanding of how the market model actually works and the complex partnerships the model produces. Finally, because contracting changes the fundamental relationship between citizens and government, it can complicate efforts to increase citizen involvement in the delivery of services.

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The Workforce Challenge: Recruiting, Training, and Retaining Qualified Workers for Transportation and Transit agencies As government reliance on contracting out increases, the importance of the government being a smart buyer—that is, knowing what it wants and how to get it—increases. If the government is not a smart buyer, the critical responsibility for the performance of public programs passes to its contractors. But effective contract management requires some level of government expertise. So while policy makers continue to puzzle over where the line should be drawn between functions that are inherently governmental and those that can legitimately be contracted out, government must determine what level of technical expertise it needs to remain a smart buyer.2 REFERENCES Camm, F. S., and N. Y. Moore. 1997. Strategic Sourcing: A Key to the Revolution in Business Affairs. Report DB-208-AF. Rand Corporation, Santa Monica, Calif. Kettl, D. 1993. Sharing Power: Public Governance and Private Markets. The Brookings Institution, Washington, D.C. Kettl, D. 1996. Civil Service Reform: Building a Government That Works. The Brookings Institution, Washington, D.C. Mintzberg, H. (ed.). 1996. The Strategy Process: Concepts, Contexts, and Cases. Prentice-Hall International, London. 2 The determination of what are inherently governmental versus commercial activities is largely a policy determination rather than a legal one.