Governments are under constant pressure to reduce costs, increase revenues, and improve service quality. A proper evaluation of how to perform services in a new way has the potential to mitigate some of these pressures. There are many different options for delivering a service. Engaging an external service provider is one option. This includes, but is not limited to, outsourcing, managed competition, and joint service delivery with another government. Where services are currently delivered externally, a government might also wish to evaluate the benefits of bringing them in-house.
Evaluating service delivery alternativess may be triggered by financial pressures or dissatisfaction through customer feedback, so consideration of alternatives poses risks, such as financial, political, legal, and service quality. The evaluatation of service delivery alternatives should be done thoroughly and objectively.
The GFOA recommends that governments carefully analyze all aspects of a service delivery option, including levels of service, service quality and expected performance, service revenues and costs, required transition activities and other relevant factors before changing service delivery methods. The evaluation should ultimately identify the reasons and goals for changing service delivery and weigh the costs of the alternatives against the benefits. This identification offers an opportunity to standardize how service delivery alternatives are analyzed, define under what criteria and/or formulas a service delivery method decision will be made and, ultimately, evaluate whether the new service delivery method met or did not meet these goals. The unbiased evaluation should have credibility to its audience.
The government should establish clear expectations and standards in analyzing service delivery options. A transparent process can help to clarify the reasons for considering such a change and the expectations of leadership for the new service delivery methods. Working closely with the government’s policy board will increase the likelihood of their understanding and support as they will ultimately have to approve such a change.
Consideration must be given to how service delivery is affected by demographics, the economy, geography, citizen sensitivity and the local political environment. Organizations are encouraged to closely evaluate the strengths and weaknesses of the jurisdiction relative to the service delivery option. Consideration should also be given to an analysis of opportunities and threats on the environment external to the organization. GFOA’s best practice on the establishment of strategic plans is a useful resource.
Stakeholders need to be appropriately involved. Stakeholder groups may include employees, media, advocacy groups, local businesses, unions, and the public. By involving stakeholders in the service delivery alternative process, governments will have a better opportunity to persuade stakeholders of the value of alternative service delivery models. GFOA’s best practice on Public Engagement in the Budget Process encourages stakeholder participation.
Issues associated with employment law compliance and existing labor agreements must be considered. If a switch in service affects union employees, options like workshops, meetings, and open forums should be considered to communicate to labor unions the possible benefits of managed competition. Human resource impacts should be a factor when making the determination whether to go ahead with service changes. As part of the negotiations with potential contractors, thought should be given to hiring the current workforce or retraining current employees for reassignment. It should be noted that shifting a service to a contractor might transfer liability and other risks to the contractor (even though these risks are likely built into the contract price).
With any approach selected, there will always be some risk. The feasibility of mitigating such risks is also an important consideration. Governments should evaluate the potential for transferring risk via contract arrangements such as bonding or reserve requirements, financing risk through insurance, minimizing risk by creating specialized oversight and monitoring roles, and/or eliminating certain risks by modifying the service delivery approach (e.g., by using multiple vendors and/or retaining a portion of the service in-house when contracting a large function, so as to minimize exposure to a single provider).
There are four options for service delivery that should be considered
- Not provide service. There may not be a legal, policy, or strategic reason to provide the service. There may not be enough demand or the cost may be prohibitive. Can the public live without the service?
- Perform alone/internally. A decision may be reached that the service should be provided in-house.
- Provide jointly with others. The service may be provided in a public/private partnership or with other governments. Purchasing co-ops are becoming more common.
- Privatize. The service will be provided, but not internally.
The financial impacts of an alternative service delivery arrangement are key to its overall feasibility and, of course, its ultimate potential value to the public. Governments should observe the following points when conducting a financial analysis:
- Focus on “avoidable” costs. Avoidable costs are those costs the government would potentially be able to eliminate as a result of the alternative service delivery method. The “full cost” of providing a service may not be avoidable because certain overhead costs may still remain.
- Internal costing information. Take steps to verify that the information recorded in the accounting system is an accurate reflection of the costs of the service in question. GFOA has two best practices on full cost accounting for government services and pricing internal services that provide additional guidance on costing services.
- Present value analysis. Present value analysis should be considered when there is a complex cash flow over a number of years or when different service delivery mechanisms have significantly different cost or revenue growth rates.
- Equipment, capital, technology (hardware/software), intangible assets (licenses), and infrastructure usage. If equipment, infrastructure or other capital or real assets are involved, they will need to be valued in terms of maintenance, replacement, condition, and any end of life disposal issues. Before equipment is sold or disposed, consideration must be given to the possibility that the service could be brought in-house in the future.
- Market input. A Request for Proposal (RFP) may be necessary to acquire estimated costs for some alternative delivery methods. Allow adequate time to prepare the RFP, for vendors to respond, and to analyze the responses.
- Peer government comparisons. Insight from how similar governments provide the same services or have changed how they provide these services can be an effective and efficient method to ensure all considerations are covered.
- Public opinion. Some forms of change in service delivery will have a higher public profile, such as outsourcing work that is currently performed by public employees or bringing in-house a service traditionally provided by the private sector.
- Specialized knowledge. Where service delivery involves the use of an outside provider, it is possible that specialized knowledge on how to provide a service could be transferred to the outside provider and lost by the government. Alternatively, use of a specialized third-party contractor may increase a government’s ability to provide public services. Outsourcing/privatization is not always the most cost-efficient way of accessing talent, even though it may seem easier than recruiting and retaining in-house expertise
- Management capacity. Some types of service delivery arrangements call for specialized management skill sets that may be available in-house or may require seeking that specialized skill set by private providers.
- Competitive forces. This risk is primarily applicable to service delivery mechanisms that rely on private firms to provide public services. Much of the advantage of hiring private firms to provide public services comes from the competitive pressure between the private firm and government over the life of the contract.
Governments should consider the flexibility of any serviced delivery agreements.
- Flexibility of the arrangement. Services provided by public employees may or may not be more flexible to change than those provided by a contracted vendor. The government should determine the level of flexibility needed and incorporate that into the analysis.
- Reversibility of the arrangement. An arrangement that can be more easily undone is less risky than one that is more difficult to undo. Developing and planning for an exit strategy at the front-end of a new arrangement may mitigate some of these risks.
- Financial risks. Governments should carefully consider who bears legal liability and consequently the costs associated with quality, performance, or safety problems should something go wrong.
Significantly changing how a service is delivered has the potential to interrupt the delivery of that service. A carefully developed transition plan will help to insure as smooth a transition as possible. Transition costs and one-time revenues should be evaluated and included as part of the cost analysis.
Governments may need to give consideration to a communication and change management strategy during the evaluation of service delivery options. The evaluation of service delivery options can draw a lot of interest from stakeholders, such as clientele and public employees that provide the service. It is important that communications with these stakeholders start early, so that they understand the nature of what is being considered, the timeline for decision, and how their interests are being recognized.
A service agreement should be treated as a contract, and the compliance with terms and conditions, especially service level agreements, should be monitored regularly to ensure they are being met. All governments involved need to agree on what will constitute regular monitoring – frequency (e.g., holding monthly meetings of the original study committee or the new governing committee to monitor progress and contract compliance), what to monitor, how to measure success (e.g., customer satisfaction, finances, employee performance, hiring, and safety), and communicating results (reporting format may include the medium or media for communicating the results (e.g., internet, paper reports, etc.). GFOA has best practices on both performance measures and monitoring. Following the guidelines in these best practices provide a useful framework when analyzing service delivery effectiveness.
- Board approval date: Friday, September 28, 2018