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Procurement Perspectives: Outsourcing to reduce or control costs

Stephen Bauld
Procurement Perspectives: Outsourcing to reduce or control costs

While outsourcing is often a method used to reduce or control costs, it raises obvious worries regarding control over service delivery, quality control and the fixing of priorities.

A purchasing department needs to be able to provide expert advice to operating departments with respect to those risks and other aspects of the process.

Irrespective of how an outsourcing arrangement may be structured, risk and rewards must be shared between the partners on a rational basis which fairly reflects the legitimate expectations of each of them.

If the assumption is that the private sector partner assumes risk, in exchange for the chance of profit, then an allocation of the following responsibilities to the partner would seem to be justified:

Ownership — The non-government partner should be required to make a reasonable equity investment in the partnership with the opportunity of making a return on the investment.

Operations — The non-government partner should be required to assume all or most of the risk that the revenues will cover expenditures while providing stipulated service levels.

Financing — The non-government partner should arrange for a substantial portion of the financing cost without government support.

In order to ensure that government policy objectives continue to be met, the municipality should retain the authority:

To set standards (often those specified in the original outsourcing agreement) and to monitor performance to ensure those standards are being achieved and maintained;

require the taking of remedial action where there is a deficiency in performance;

impose penalties in order to discourage the possibility of cheating; and

intervene directly should actual standards of performance fall below a specified level.

Outsourcing is beneficial only where the cost to the municipality of adopting such a method of providing services is less than the cost of providing them internally.

Although private sector operations are generally more effective than public sector operations, it is fallacious to assume a private sector solution is always cheaper or will provide superior service, especially where the service that is the subject matter of proposed outsourcing can be piggy-backed onto some other municipal service that will continue to be provided by the municipality.

For instance, a recycling program may be more efficiently operated in conjunction with a municipal garbage collection program than by a private sector organization that does not operate the existing garbage collection program.

To ensure outsourcing will result in lower aggregate costs many municipalities have now introduced a practice of having internal divisions within the municipality submit a bid when work is offered to outside suppliers through a tender or RFP.

Where such an approach is taken, it is important to understand that an “in-house bid” is not the same as a tender.

A municipality does not bid for its own work. Rather, like all prudent customers, it must decide whether it is cheaper to carry out work internally or purchase that work from an outside supplier.

To achieve a sensible cost comparison, care must be taken to ensure the in-house bid is a cost exercise.

The goal of the exercise is to see if the municipality will achieve any cost saving through outsourcing.

As a general principle, the general obligation of a municipal council to manage the business and affairs of a municipality in a prudent manner dictates that work should never be outsourced when the municipality can carry out that work more cheaply on a force account basis than by way of retaining an outside contractor.

Indeed, even when in-house work is more expensive than outsourcing, it may still be wise for a municipality to stay with an in-house supply.

Stephen Bauld is a government procurement expert and can be reached at Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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