Decision Making for Outsourcing and Privatization of Vehicle and Equipment Fleet Maintenance (2011)

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31.1 Study Context Privatization has been a subject of interest for the public and private sectors since the concept gained wider acceptance in the 1970s. Outsourcing is considered a form of privatiza- tion in which the service delivery is contracted to an external private vendor, while the sponsor retains oversight and con- trol over delivery. Public- and private-sector organizations have embraced outsourcing because of benefits such as lower costs and better quality. The market for outsourced services has increased over time, with firms offering services ranging from specialty to comprehensive. The private sector has gained tremendously from outsourcing because it offers better-quality services at a lower cost than performing the job in-house. This enables private firms to focus on their core products, which helps them to gain competitive advantage and venture into new directions that improve their market position over their competitors. However, the public sector has had mixed suc- cess with outsourcing. Although the scope of government out- sourcing has expanded from simple to more stylized services, the challenges public managers face to maintain effective and efficient service delivery have increased, sometimes resulting in substandard levels of service quality (1). Others have had success gaining the intended benefits of outsourcing. The overall growth in state highway programs and the lack of growth in department of transportation (DOT) staff have resulted in the need for state DOTs to rely more on the private sector to deliver services (2). NCHRP Synthesis of Highway Practice 313: State DOT Outsourcing and Private-Sector Uti- lization (2) found that state DOTs outsource highway-related activities in the areas of administration, construction, design, maintenance, operations, planning, and right-of-way. The study found that the majority of DOTs reported outsourcing activities that grew or remained the same over a 5-year period and projected an increase in outsourcing levels in the near future. The most common reasons cited for outsourcing were lack of sufficient staff and the right combination of skills. DOTs infrequently cited cost-effectiveness as the reason for outsourcing. In the public-sector realm, not all activities are appropriate or even eligible for outsourcing. Outsourcing cannot be the cure-all for all cost- and performance-related issues (3). It is usually inappropriate or unacceptable to outsource certain services that are inherently governmental, such as law enforce- ment, policy making, and public safety. In such cases, the risk of contractor failure outweighs the benefits of outsourcing. In the early 1990s, the City of Indianapolis clearly distinguished the potential outsourcing candidates between policy-making and policy-implementing functions. The city decided that only the latter should be eligible for private-sector bidding (4). In the area of fleet maintenance, many public agencies already outsource the fleet and equipment maintenance work. Resource limitations, staff shortage, and lack of specific skills are the most commonly cited reasons for outsourcing. Many municipalities, such as the cities of Indianapolis, Charlotte, and Winston-Salem, have resorted to managed competition, whereas the City of Pittsburgh has turned to privatization for improvements. Many state DOTs, such as those of Massachu- setts, Virginia, Texas, and Missouri, have outsourced certain maintenance functions and have had varying levels of success. The decision to outsource is not an easy one. The organiza- tion has to answer a variety of questions about the criticality of the outsourcing candidates to the organization’s mission and goals, availability of third-party vendors, cost, and service qual- ity, to name a few. A variety of successful case studies, practices, and decision models are available and applied in the private sector to evaluate outsourcing decisions. However, caution should be exercised in translating these models for use in the public sector. When considering outsourcing strategies, the profit and business development motives of most private- sector organizations need to be balanced against the legal, eco- nomic, public service, and political mandates of government. Currently, there is no widely accepted general process for evaluating and deciding on the various options for outsourcing C H A P T E R 1 Introduction

fleet maintenance. This project aims to bridge this gap to develop a logical framework for making outsourcing decisions with due consideration to the key factors that drive them. Pub- lic agencies involved in maintenance of nonrevenue vehicle and equipment fleets will be the primary users of this decision framework. 1.2 Study Scope and Objectives The most common reasons cited for outsourcing and/or privatization by state DOTs are cost cutting, improved service quality, lack of resources, and lack of specific skills or expert- ise. The resources freed up through outsourcing and/or priva- tization may be diverted to other critical activities within the DOT. In a competitive environment, the profit motive and the opportunity to secure future contracts are sufficient motiva- tion for the private-sector vendors to maximize performance, improve efficiency, and deliver quality service in a cost-effective manner. Vehicle and equipment maintenance are among the services that are typically not considered core or mission- critical, and are ideal candidates for further evaluation. Because of growing demands and resource limitations on vehicle and equipment fleet maintenance, state DOTs often consider the outsourcing and/or privatization of these serv- ices. However, these decisions largely depend on fleet size, vehicle mix, and equipment type, and are influenced by cost- effectiveness, timeliness, and external market conditions. Also, state DOTs can implement outsourcing and privatization in a variety of forms with different levels of agency involvement, such as outsourcing statewide or regional activities and selected outsourcing of specific activities, and with different levels of responsibility for quality control and assurance. Currently, there is no widely accepted process for evaluating the alterna- tives for outsourcing vehicle and equipment fleet maintenance. NCHRP Project 13-03A aims to develop a logical and sys- tematic decision-making framework and process to address the various plausible scenarios in which fleet maintenance out- sourcing and privatization decisions should be considered. The decision framework and process should address the following: • Various levels, scope, and scenarios of outsourcing and privatization, • Performance and quality assurance issues, • Level of agency involvement and/or delegation, • Various fleet compositions and existing resources, • Local and regional operating imperatives, • Procurement policy and rules extant, and • Local and regional service markets. 1.3 Purpose and Organization of This Report The purpose of this report is to present the outsourcing decision-making framework for state DOT fleet outsourcing. The report is organized into the following chapters: • Chapter 1: Introduction—Describes the study context, project scope, and report organization. • Chapter 2: Background—Provides background on typical characteristics of state DOT fleet and equipment, challenges of outsourcing state DOT fleet-maintenance operations, and definitions of key terms. • Chapter 3: Scope of Outsourcing Decision Framework— Identifies and lists specific requirements regarding the out- sourcing decision-making process. • Chapter 4: Fleet Outsourcing Decision Framework— Introduces the three-dimensional outsourcing decision framework that considers equipment class, maintenance service type, and organizational unit, and how it can be applied to capture a full range of fleet outsourcing alterna- tives. Defines a decision process model for key process phases, process activities, decision points, and relevant eval- uation criteria, along with a logical sequence in arriving at various outsourcing decisions. • Chapter 5: Case Studies—Illustrates the practical appli- cation of the fleet outsourcing decision framework using case studies. • Chapter 6: Summary—Summarizes the report. • References—Presents the references for the report. • Appendix A: Summary of Outsourcing Model and Process Steps—Presents all of the subprocesses in one chart, and lists the inputs and outputs for each step. • Appendix B: Forms and Templates—Presents the forms and templates to support the outsourcing analysis. 4