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Procurement Perspectives: Will outsourcing result in lower aggregate costs?

Stephen Bauld
Procurement Perspectives: Will outsourcing result in lower aggregate costs?

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 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 the work internally or purchase that work from an outside supplier.

To achieve a sensible cost comparison, care must be taken to ensure the bid is fairly representative of the actual in-house cost; the preparation of an in-house bid is a costing exercise.

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

As a general principle, the 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 in a more cost-efficient manner 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. For instance, in order to maintain full control over the provision of services to municipal residents, particularly with respect to the quality of services provided.

As is often the case with procurement decisions, simple price comparisons can be misleading.

For example, if one assumes a yearly requirement for IT support in the range of 2,000 hours and the hourly cost of outsourcing IT support is $100 an hour, while the internal salary cost of hiring an IT technician to provide force account support is only $40 per hour, a simplistic straight price comparison of these two items of expenditures would suggest that the force account solution is cheaper.

However, a more comprehensive comparison of price and service can lead to a very different conclusion.

If the lack of specialization leads to a need for further outside assistance in 10 per cent of the cases in which IT support is required, and the inability to pool information and training leads to a further 10 per cent loss in the efficiency of service, then the cost of outsourcing is lower than the cost of force account coverage.

This philosophical viewpoint is entirely hypothetical and certainly should not be taken to mean outsourcing is always or even likely to be cheaper than force account procurement.

The sole point the above thinking seeks to make is the need to follow a comprehensive approach to costing when deciding which method of procurement is best suited to a municipality’s needs.

A key concern where outsourcing is used is whether market conditions permit a municipality to secure an adequate supply from a suitable range of competitive suppliers.

Without a competitive market in which to outsource, there is a risk costs will escalate towards the monopoly price level.

Indeed, one of the standard justifications for government supply of a particular commodity is the need to control price under conditions of supply that tend naturally towards monopoly.

Even if there is no true monopoly, if there are only a few suppliers who are able to bid for the work, there is a significant risk that a non-competitive price will be obtained.

An outside source of supply for some service that the municipality might otherwise provide itself may on occasion be secured by subsidizing a private sector supplier to provide that service to qualified residents of the municipality on a subsided basis — the qualification being determined by some form of means test.

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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