This paper presents a brief survey of contemporary arguments and research
findings concerning
outsourcing or
contracting out in the public
sector. Outsourcing is an arrangement whereby a contracting agency enters into
a contract with a supplier from outside that agency for the provision of goods
and/or services which typically have previously been provided internally. It is
often combined with competitive tendering for the contract to provide the goods
and services (pp 1-2).
While governments have always purchased some goods and services externally,
in the last two decades there has been a movement to the wholesale use of
competitive tendering and outsourcing as a tool of public management. These
reforms have been driven both by budgetary pressures requiring reduced
government spending, and by the influence of economic theories about public
administration. Policies on contracting out have been adopted by the
Commonwealth government and most State governments. Labor and Liberal/National
governments have both supported the use of competitive tendering and
contracting, although conservative governments have generally been more
disposed to favour its use on theoretical grounds as a preferred method of
service delivery. In New South Wales the use of competitive tendering and
contracting has been growing rapidly; reported expenditure on contracting in
the public sector in 1995-1996 was $1.76 billion (pp 2-10).
The paper outlines some methodological and other considerations in
assessments of the benefits and savings from contracting out (pp 10-13), and
summarises some recent surveys on the empirical findings of studies of
public sector contracting. Some studies report considerable savings and
increased efficiency, while others find no benefit or even increased costs
resulting from tendering and contracting (pp 13-16).
The advantages of contracting out include the potential for: cost
savings; increased accountability of service providers through contract
specifications and performance measurement; better work and management
practices; access to greater skills, knowledge or technology; better use of
capital and equipment; better service quality; greater flexibility in services;
local industry development; and fewer industrial relations issues (pp 16-22).
The disadvantages of contracting out include the potential for:
reduced accountability of government for contracted services; loss of privacy
and confidentiality of personal information; collusive tendering and other
tendering problems; loss of control by the government over the contracted
services; reductions in quality of services; the costs of outsourcing; savings
to government resulting from losses to other groups, rather than from increases
in efficiency; and the effects on levels of employment and on the wages and
conditions of employees of contractors (pp 22-29).
The question of what kinds of government services should be
outsourced depends on one's theoretical perspective on issues such as the
extent to which the private sector should be involved in the provision of
government services. It also depends on practical considerations as to what
services can successfully be outsourced, in the sense that the desired cost
savings and service quality will be achieved. The paper includes guidelines on
assessing the scope for competitive tendering and contracting published by the
New South Wales Service Competition Project Advisory Committee of the Council
on the Cost of Government (pp 30-32).
