The United States Department of Labor describes competitive sourcing as a key element of the President’s Management Agenda that seeks to get the best value for money on taxes paid by the American people. This is accomplished through a strategic plan that leverages the market economy’s competitive forces to improve the efficiency of the government. It involves awarding of tasks and activities to the most qualified party through a competitive process. Government organizations are allowed to compete for work against the private sector based on the assumption that both can perform tasks and deliver commercial services cost-effectively and efficiently (Schooner, 2004).
In their article, Davis & Green, 2001, discuss how outsourcing and privatization efforts can be made more effective. The United States Department of Defense is used as the case study since it is under more pressure to reduce its staff and transfer some of its work to the private sector as a means to save costs in the war against inefficiency and shortfalls on the budget. This text also explores the need to address adequately issues on the choice and implementation of potential inter-organizational controls.
Privatization generally refers to shifting of government functions and activities to the private sector via a competitive bid. One form of O&P is called co-sourcing which involves a partnership for equipment and expertise with an outsider. Another form, commonly referred to as “franchising”, involves an outsourcing relationship where a government agency can acquire another government agency for a specific function.
Nothing is without controversy and debates have been sprouting about what government functions and activities can be outsourced, privatized or competitively sourced. Activities such as combat, commanding troops, setting foreign policy, and control of the Treasury accounts are widely accepted as restricted activities and therefore inherently governmental. However, there have been contradicting circumstances that have put into question these activities regarded as inherently governmental.
O&P has been adopted aggressively by the army and NASA. This is probably because it is believed to save money. The primary source of O&P savings is generally through reductions in personnel costs. The competition also drives contractors to provide better quality services and focus more on customer needs. For example, the DoD can benefit from the competition through faster delivery of products and services thereby increasing readiness. Commanders can also get additional flexibility.
In an attempt to establish and implement inter-organizational relationships in ways that would increase the probability of success, various control regimes have been adopted. One such control regime is price. The government has often favored relationships governed by what is called “price.” One way of implementing this control regime is by capturing the inter-organizational rules of engagement within a detailed contract as in the case of the Air Force. Contracts have to specify rewards as well as punishments in order to achieve desired outcomes and behaviors. To ensure adherence to the contract, heavy oversight is established. Reliance on contracts is understandable given there have been a series of embarrassing incidents in the past. This, coupled with suspicions, increase the desire to rely on one control regime, that is, price. However, this might actually result in higher long-run costs.
Another control regime often employed by the government is the “authority” control regime. This control is invoked when the two parties both accept that certain outcomes are affected by events that are way beyond the influence of the contractor. Breakthroughs and milestones have proven to be extremely difficult to predict. Governments also often demand changes to the contract after the fact, forcing contractors to necessitate numerous adaptations. In its enforcement of the authority control regime, the government relies on a variety of mechanisms such as appointing standing committees to review contract progress on a regular basis. This has led to ease of tensions and increased flexibility within contractual relationships. However, this mechanism still relies heavily on oversight.
Despite the fact that authority controls have eased the downward spiral in many inter-organizational relationships, a move to “trust” mechanism is still needed. Economists are known to give up on trust and escape the possibility of O&P. Contractors would be less utilized if the government chose to privatize and outsource from only those areas that are considered safe by economists. The alternative to those relationships that resist both price and authority controls is the implementation of sociological trust mechanisms. In case the ability to monitor is inefficient, price and authority control mechanisms are bound to be ineffective. Certain contracts must, therefore, rely on trust in order to succeed. However, reliance on trust also has its equivalent amount of risks. To improve the relationships between vendors and buyers, and consequently increase the chances of success of the O&P, various mechanisms have been employed to nurture and develop sociological trust. These applications of trust mechanisms involve recurrent interactions, cultural knowledge, personal relationships, negotiation strategies, and values training.
There is an increased expectation placed on financial managers and government accountants to adopt practices that increase government efficiency. This has led to the O&P focusing on short-term cost reduction. Consequently, problems and complications have arisen due to the uncertain long-term futures of adopting aggressive O&P practices. To mitigate these problems, an enlargement of the recognition of control needs for the O&P efforts has been proposed.
In conclusion, it can be argued that the appreciation of the benefits and limitations of price control in a relationship should encourage managers to come up with an appropriate blend of the control mechanisms discussed. This might be the key to a successful and effective implementation of competitive sourcing efforts.
References
Davis, K. J., & Green, S. G. (2001). Trust as control in competitive sourcing. The Journal of Government Financial Management, 50(1), 10.
Schooner, S. L. (2004). Competitive sourcing policy: More sail than rudder. Public Contract Law Journal, 33, 263-297.
