Outsourcing: what we pay for is what we get

Ross Gittins makes some obvious, but important, points about what is lsot when vital public services are contracted out. As he says, economists have known this since the work of Oliver Hart, last century, but it’s only now penetrating the policy establishment. In the UK, which led the charge for outsourcing under Thatcher, insourcing is the New Big Thing.

Unlike Hart, I’m not in the running for the Economics Nobel, but I’ve spent much of the last thirty years supplying empirical support for his theoretical analysis.

12 thoughts on “Outsourcing: what we pay for is what we get

  1. I found Hart’s stuff difficult. Can you readily draw up contracts (particularly on “quality”) that will not produce bad outcomes? I recall at my university that they contracted out a cleaning service to “save money”. It ended up with the cleaners spending about 1 minute per office, so costs were reduced, but offices became filthy and people brought in equipment to clean up themselves – thereby increasing unobserved costs. The profit motive is obviously insufficient and it is difficult to contract on “quality”.

  2. Harry – you can, if you retain enough in-house expertise to monitor performance and credibly threaten to take back the service. I have a fascinating book on building British battleships (not only expensive, but very, very complex). Almost all were built by contractors, but the Admiralty insisted on maintaining equivalent capacity in the royal dockyards. They had in-house knowledge of the issues, a technical staff they could rely on and a solid base for cost comparison. So costs were very competitive and quality high. The one area they did not have in-house? Armour plate (very capital intensive, highly specialised). They got stiffed on price there.
    In many areas – even seemingly mundane ones – expertise is slowly gained, easily lost. Rebuilding in-house is a job of years, sometimes decades.

  3. @ Harry Clarke
    I have worked for two out-sourcing company in the food-services field. If a) the contractor is reasonably honest, and b) oversight is very strong it can work well but if either fails you have a mess.
    But here the key point is that we were not the key business. The key businesses were oil drilling or prisons or education.

    With your cleaning example, I worked for a corporation that out-sourced cleaning quite successfully but our people had years of experience in dealing with sub-trades and understood the contracting process

    In more complicated situations, outsourcing key business functions appears insane. To paraphrase an old colleague, once you lose the ability to do it yourself, you can be sold anything.

  4. Peter and jrkrideau made comments that reminded me of the injunction – do not outsource “core competencies”. This was part of the literature that emphasised skills rather than products in public and private firms. The core skills that a firm (public or private) possesses should be kept inhouse. Actually the “cleaning” example I mentioned is not consistent with this injunction and I think it was just lousy contracting by incomptent university administrators. But a prison should remain in public hands since you cant easily contract on delivering prisoner quality. The incentives are to lock prisoners up all day since this minimises immediate costs but creates reasons for the prisoners to become violent psychopaths who impose big costs on society – you don’t outsource these services.

    Peter’s points about being able to assess performance inhouse by maintaining reference activites that are not outsourced is a good one. For example, you might want to partly outsource parcel delivery in a postal service both to provide competition for public providers and to provide comparative cost information across public and private providers.

  5. The quality of the project, or service, starts at the top and if management has been outsourced there is no one sufficiently skilled to “manage management”.

    When the principals’ representative doesn’t fully understand a contract there is bound to be major problems.

  6. Having spent fifteen years in the VPS, I became deeply cynical about outsourcing. Everything they say is true – lazy and incompetent managers outsourced core skills that if we didn’t have, we should have. The ambitious ones were keen on the recurrent budget numbers, the lazier ones were just after simple answers. To be fair to the companies we used, they could listen, and tended to write exactly what we wanted them to. And they did work their juniors hard, far harder than I’d demand of my staff, often on boring stuff too. I couldn’t be bothered doing the CBA on a RIS, since it was a garbage process anyway. But when they started actually drafting regulations was when I got fed up with the bullshit. Imagine a government that can’t even make its own laws.

  7. I blame neoliberalism and managerialism. John Quiggin wrote heaps about this in the 1980s and 1990s: all illuminating, all correct and all now justified and vindicated in light of the ensuing history of Australia and the world since about the year 2000.

    In relation to wilful’s comment, I can give a little personal take on these matters.

    I read Das Kapital Vol. 1 in my early twenties (circa 1977) and not as part of any university course but simply out of interest. I had read nothing else at all on economics or political economy so I was a blank slate in every sense. Vol 1. made me an armchair socialist of sorts and an accepter of the labor theory of value for a long time. My general beliefs afterwards could probably have been characterized as Fabian-like, although I knew nothing about Fabian Socialism per se. In practice, I accepted mixed-economy capitalism with a social-democratic steering hand. That pretty much describes the Australian economy in those times. Eventually, I preferred to shift from private enterprise employment to public employment as I did feel exploited in private enterprise (in places like gravel-pits, factories and building sites with serious health and safety issues and then in suburban bank branches with stultifying procedures and structures.)

    For reasons of life-course, I read nothing more on economics and political economy until circa 1997. Then I started reading John Quiggin’s outputs, except for the stuff too technical for a layperson, and texts like “Economic Rationalism in Canberra: A Nation-Building State Changes its Mind” by Michael Pusey. “Economic Rationalism” was the Australian term for neoliberal economics of course, also sometimes termed market fundamentalism. Economic rationalism had begun reaching into the Federal public service (where I was by this time) via the mechanisms of government policy and generic managerialism of American origin. I was baffled and angered by what was going on. Those were the Howard years.

    As an “unconscious Fabian”, I suppose, I experienced the “reforms” of economic rationalism or neoliberalism as infuriatingly regressive. The very use of the term “reform” for these changes was near incendiary to me. I became intellectually radicalized and contested verbally with my managers and my union officials (that former practice eventually became a career side-lining move which eventually led to that strange but relatively lucky outcome, an involuntary voluntary redundancy). To the managers I had been “frank and fearless”, at times, in expressing my opinion that the management and policy changes were anti-worker, anti-society and were destroying the efficiency and effectiveness of the workplace in delivering social security and welfare services.

    Our union officials I eventually accused of being “in bed” with the neoliberals. Lucky it was only the CPSU and not a “radical” union or I might have got myself bashed up, probably later. My fellow workers would not take any open industrial action, which I for one, spoke for at union meetings. Industrial law was rapidly changed across Australia to make industrial action very difficult for a workforce – docile in most workplaces – to contemplate. We got screwed because we would not fight back. It’s as simple as that. Neoliberalism defeated labor. I think we all know that now. But this is not the end of history. There is no end of (human) history unless and until homo sapiens goes extinct.

    We have to take the attitude that lack of progress (or regress to term it properly) in political economy, in our working lifetimes, was a stage. Historical stages can take a long time to play out. Neoliberalism, which is 40 years old and counting, took over and ossified the system into a setting and orthodoxy which still seemed unchangeable even after the GFC, at least until COVID-19 turned up. But this neoliberal phase is nearly played out. Great disruptions are coming as the neoliberal economy fails under its own internal contradictions and under exogenous shocks like zoonotic disease outbreaks and climate change. We are at a watershed moment. New thoughts are becoming thinkable. New political, economic and social structures can emerge. Don’t presume this will occur in a growth setting. It may well occur in a de-growth setting as a phase of catabolic collapses plays out. This could be “creative destruction” on a scale which will scare the shite out of the most ardent revolutionary or disruptor.

  8. JQ, 17 years on, would you or have you changed you mind re volunteering?

    “Calling for volunteers
    JULY 22, 2003

    JQ: “Anyway, Costello is talking about social policy and volunteering and I just wanted to emphasise the point that the application of New Public Management/neoliberalism to the voluntary sector, exemplified by competitive tendering programs like the Jobs Network, makes volunteering utterly pointless. The only effect is to save money for the government while delivering a predefined set of services. In most cases, volunteers would be better off working overtime and sending a cheque to the Treasury.”

    This today, current advise to the disabled:

    “These people are granted medical exemptions from their mutual obligations by their employment services provider, but this period does not count towards their 18 months of required job search.

    “They get told you have to complete your program of support, but they’ve been too unwell to do it,” Siewert said.

    “A Department of Social Services spokeswoman said  …
    “Payment recipients who are otherwise exempt from meeting obligations are also able to volunteer to utilise programs of support without any penalties for not meeting typical requirements,” she said.”

    Anyone know how much outsourcing the disabled to jobs service providers, has cost, to ‘manage’ this ‘volunteering’ cohort?

  9. The economics of outsourcing is difficult. For me, the economics of contracting is not the main issue. When people’s liberty is restricted in prisons or in an attenuated version, hotel quarantine, there should be complete transparency and political accountability. This will not happen with private security firms most often involved in employing nightclubs bouncers, and frisking people at the football. Public servants and the police have let Victoria down by outsourcing hotel quarantine.

  10. I’m not as confident as others in the headline idea that “what we pay for is what we get”. I suggest that too often you get those parts of the contract that you’re willing and able to enforce, and that the supplier is capable of delivering.

    We see this is IT a lot, where neither party knows what is actually required so they write a contract that guarantees payment in return for some level of effort at delivering what the purchaser thought they wanted at the time the contract was written with allowance for the inevitable changes.

    Where I work now we get circuit boards made in China, then populated in Australia and finished off inside the company. Populating boards is all about a very expensive set of robots that ideally work continuously and we don’t produce enough to do that, so we contract to someone who does. The advantage of local is that we keep all the bits and bobs needed for a run, and for a long time. We can, and occasionally do, build a new copy of a very old design because that’s cheaper for the customer than upgrading. I can’t imaging posting that stuff overseas and getting it back undamaged, let alone getting working product back with it. It’s all tooling that can be reproduced, but it’s expensive and I doubt it’d ever be worth while. The trouble is that when people replace systems they often go to market rather than just sticking with their known-good supplier… us.

  11. Hiring all these brigands and privateers. What a waste of money. When we have a huge army of public servants that can be redirected and retrained. Part of this is this cult of employment going where you need a resume as long as your arm just to try out for the most simple job. I’m not saying that we need to get the army to do security work. We could have transferred other public servants who weren’t doing essential work. It shouldn’t have been seen as specifically a security problem. Its a containment of a virus problem. Its not necessarily muscle and intimidation work.

    But putting aside the pandemic; all the accounting firm brigands, some of them foreign owned. Are we saying that public servants are innumerate and cannot be retrained to do accounting work? This is all wasted money and wasted training opportunities. Plus its a kind of political patronage, trying to get these rent-seekers to put the government and government policy in a good light. We need to get rid of this addiction to outsourcing and asking our public servants to be flexible generalists who always taking on new tasks. Always pushing them outside their comfort zone. This is what is needed and its an alternative to public servant numbers reductions.

    Not a fan of neocon Max Boot. But a long time ago he wrote one very good book on what lead to triumph in war. Its not the obvious stuff that people think. His findings were that the key determinant was the nature of the government bureaucracy. We want a public service where these guys are constantly challenged, constantly retrained and with a can-do attitude. I mean accounting? Come on people. We don’t need to throw money away on outsourced bean-counters. Accountants? We can’t train public servants to be accountants? Plumbers I can understand.

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