The Role of Public Sector in the Outsourcing of Intermediate Services to Private Suppliers - Essay Example

Public sector outsourcing Introduction Outsourcing intermediate services of the public sector from private involves provision of these services by an organisation in the private sector. It is an arrangement in which a contracting agency enters into a contract with an outside supplier for provision of certain services. It is usually done through tendering. The provision is usually under an agreement that is ongoing or time specific and involves a level of delegation of the responsibility of management. These services are services have to be services that the in house employees can as well provide. In this case, the turnover from the services outsourced measures the size of the industry. The services could be such as information technology services, catering facilities, or office support services. However, services of specialists such as legal, accounting and consultancy do not fall under services outsourced. Determination of outsourced services therefore depends in part on client’s nature. The services have a contribution to the gross turnover, gross value added, employment and contribution to ex-chequer. The government has been observed over the years to acquire certain services through outsourcing other than using the public employees. Rationale for public sector increasing the use of outsourcing When the public sectors started outsourcing services, the focus was mostly on the services of junior and lowly paid staff such as security and cleaning services. By 1990, the outsourcing function of the public sector increased and expanded to other services with new technological advancements which about the need for contracting individuals with greater skills. There was also a need for an outsourcing programme that was wide ranging and this resulted from a strong line between the environmental departments and the local government. This opened up an opportunity for open tendering, with the use of the lowest price criteria for the award of contracts. Since then, the public sector has adopted the outsourcing, it has become sophisticated and a key means for delivery of public services. The UK economy specifically has experienced the benefits. Local authorities were outsourcing in large numbers at the time of New Labour Government in 1997, and this led to eradication and replacement of criticisms that the focus on price alone was affecting quality, with a viewpoint of best value, which took into account quality and price. There followed the outdoing of the concept of in-house team always being able to provide services at a low price, by tendering and ensuring the provision of services by the most competitive tenders. There was a contemplation of Benefits Agency whose effects a number of staff in the public sector would have felt. According to Tirole (1988), outsourcing exposes private sectors to a situation whereby two or more suppliers competing on quality, thus increasing the equilibrium level of quality and efficiency as well. Coase (1937) from the economic theory of price mechanism confirms the fact that formation a firm results from complexity of the labour factor in addition to other factors. The formation of the public sector therefore is dependent on outsourcing. Public sector outsourcing value is approximately half of the spending on public procurement. The outsourcing has attained diversity in the local government, reaching to areas of social care, collection of waste, services of back office as well as collaborating with organisations in the private sector. This has resulted to integration in the public sector as the benefits resulting from this ranging from cost reduction in operations and injection and implementation of new investments and technology in the public sector without its having to introduce new working methods by the in-house team. It also results to holding few permanent staff by the public sector, which is impressive to the Treasury, as it does not lead to redundancy payment and long-term commitment. It is also beneficial on the grounds of flexibility. However, the benefits weighed from integration must be higher than the public sector’s ability to choose a new method of payment and this method of payment is a function of an observable state of nature performance of the parties to the outsourcing contract. This performance must be observable (Grossman & Hart 1986). Many state and local governments have attained a considerable savings from outsourcing of services such as collection of trash and waste, treatment of water and repairing of potholes from private suppliers. The public sector therefore must come up with a clear analysis for cost and benefits that outsourcing will derive. This will help in determination of whether the outsourced party will be more efficient than the public employees will. According to Williamson (1981), transaction cost approach as one of the economic approaches, focuses on the efficiency and in the case of outsourcing, the efficiency of the outsourced party and the service provided must be determined. In this theory, whether to outsource services is also dependent on skill requirement and thus cost effectiveness and benefits are important aspects considered by government when contracting intermediate services. In addition to cost saving, the public sector derives other advantages such as accountability where the governments need to specify the objective of the services outsourced. Another advantage is the delivery of better work and management practices, access to better skills, knowledge and technology, enhanced quality service as well as efficient use of capital and equipments. Relationship of outsourcing to the negative impact on quality of services provided Outsourcing of the public sector on the other hand has some negative impacts. One of there is the reduced government accountability that arises from the fact that the activities of the governments in some ways become less transparent as a result. It therefore leads to difficulty in determining the responsible parties in performance of certain services. This arises from the extension created by the line of accountability. It therefore becomes difficult to seek redress since the outsourced person increases the scope of shifting the blame. For instance, the commonwealth evaluation report concluded that it is much better if matters involving substantial privacy, control, and accountability by the government, remaining in-house. Loss of privacy is another negative impact of outsourcing. Contracting of outsiders to perform services for the government exposes the information that is private for the government to these parties. Outsourcing therefore is associated with lowering the privacy protection levels. Confidentiality issues is another impact whereby outsourcing is compared to using the permanent employees and the conclusion derived from this comparison is that in terms of confidentiality, outsourcing cannot match the quality of services of the in-house employees. Another negative impact resulting from outsourcing is collusive tendering and the issues related to it. There is a risk attributed to the process of tendering that the government uses to acquire the most competitive tenders for performance of a certain service. This is because, cases such as those of partiality allegations and cases where the competitive selection might fail to be done may arise. The result of this may be the government losing the authority of returning the function back to be an in-house function or it may end up losing the expertise and knowledge of necessary to negotiate the contract with the other companies (Tirole 1988). another negative impact is the loss of control. The public sector might lose control over suppliers because of outsourcing. This may be because of the required in-house expertise to manage the contract. The public sector therefore might end up lacking the skills to help them monitor the work of the contractors. This leads to the public sector fully depending on the contractor for the performance of the service. The contractors therefore may take advantage of this to pursue their own interests as opposed to the public interest. Quality is another issue that may result from outsourcing. As much as the public sector may consider outsourcing as a remedy for attaining quality services, it may as well lead to poor or compromised quality services (Williamson 1987). This may arise in case the government lacks the appropriate skills to identify the performance indicators for performance of a service. Another negative impact is financial costs whereby outsourcing results to additional costs by the public sector. There might be more costs arising from outsourcing that might even outweigh the savings achieved. In addition, sources of saving transfers are another issue associated with outsourcing. This is because cost reduction may result to other transfers, which may arise from sources such as reduced quality of service and reduction in wages. There is therefore an evidence of a worse off condition because of outsourcing by the public sector. Some of the transfers are cost shifting transfers and transfers resulting from cost evasion. There are also effects on employment effects in that it results to an overall loss of job. The permanent employees might end up losing jobs as a result or facing a reduction in wages. The persons contracted for outsourcing perform the services that could be performed by in-house workers, which contributes to reduced employment opportunities (Grossman & Hart 1986). It as well results to vices such as increased workloads, increase in the level of unpaid workers as well as increase in the level of workplace injuries. Reference list Coase, R. H. (1937). The Nature of the Firm. Economica, 4(16):386-405. Retrieved from: http://www.colorado.edu/ibs/eb/alston/econ4504/readings/The%20Nature%20of%20the%20Firm%20by%20Coase.pdf Williamson, O. E.(1981). The Economics of Organization: The Transaction Cost Approach. The American Journal of Sociology, 87(3):548-577. Retrieved from: https://amirone2006.files.wordpress.com/2013/10/willimson-1981.pdf Grossman, S. J. and Hart, O. D. (1986). The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. The Journal of Political Economy, 94(4):691-719. Retrieved from: http://dash.harvard.edu/bitstream/handle/1/3450060/Hart_CostsBenefits.pdf?sequence=4 Tirole, J. (1988). The Theory of Industrial Organization: Jean Tirole. MIT press. Read More