A bright light in President Bush’s proposed 2003 fiscal year budget is his first move to embed performance into the appropriations process. The result is a process for tying a government agency’s overall performance to the use of performance-based contracting – and this is a useful lesson for state and local governments as well.

First, the federal Office of Management and Budget has created a Management Scorecard included in the FY2003 budget that score agencies Red, Yellow, or Green based on how well each agency is doing in meeting the President’s goals for improving performance, including competitive sourcing and performance-based contracting. The scorecard is a sea of red, with every single agency evaluated getting a red light on competitive sourcing. So there is a ways to go.

Second, the President is walking the talk of focusing not just on how much money programs get, but how they perform. As a result, some poor performers are lined up for budget cuts, while others with notable success received more investment of resources. 

• Department of Energy’s fossil energy research and development programs were judged ineffective and budget for $43 million less than the $101 million they were funded at this year;

• Department of Labor’s Youth Opportunity Grants program paid for its failures with a $180 million cut, while the successful Job Corps program got a $73 million boost; and

• Department of Agriculture’s nutrition program for Women, Infants and Children (WIC) successes led to a increased investment of $364 million.

Competitive Sourcing

The President's Management Agenda embeds goals for competitive sourcing in the context of performance-based management. His goal is for agencies to compete 15 percent of positions by 2004, 20 percent per year after that. His goal for outsourcing – NONE. And that is good, whatever you may think about whether agencies are doing things the private sector can do.

Why is that, you say? Because President Bush is after bigger fish. An outsourcing goal is an ephemeral thing, with nothing to sustain it over time. President Bush instead is looking to change the institutional structure in which decisions about what an agency should be doing are made.

A central challenge in government management is the limited signals agencies get about how programs are working and how customers are being served. Without a bottom-line and without competitive forces, program structures and approaches often stagnate, while success is not always visible and replicate, and problems grow.  Worse, since budgets are not linked to performance in a positive way, too often poor performers get rewarded as budget increases follow failure.

Before fundamental change can occur in government, we have to have get a bottom-line and a competitive system. This is why for over 20 years Reason's work on privatization and outsourcing has emphasized these are not ends, but tools.  Competition is the end.

The five areas and goals of the President's Management Agenda are really aimed at creating the institutional change that creates a bottom line and a competitive system. Performance is the common thread.

In applying competition to decisions about doing activities in house or moving them to the private sector, these institutional changes begin to solve the problem of inadequate cost information to begin with and no longer accepts agency's failure to use performance measurement to track and compare quality/value.

Where outsourcing has worked best, it has worked because the agency was motivated by a search for “better value” rather than “reduced cost.”

Processes Need to Evaluate Performance

The difference between outsourcing projects deemed failures versus those deemed successes is the presence of several critical success factors including:

Clear strategic logic. Successful outsourcing projects begin with the establishment of a clear strategic logic for the agency that is cascaded down clearly to performance expectations for every program and function within the agency.

Reliable financial information. Projects must have adequate and accurate cost information, usually provided by systems that use activity-based costing or other mature accounting practices.

Emphasis on redesign/re-engineering. Agency leadership should aggressively pursue a "redesign" option that allows agency operations to be re-engineered prior to the competition. As our research uncovered, in many cases the agency emerged better off as a result of its redesign efforts, regardless of which side won the competition.

Performance measurement. Successful projects define and monitor clear measures of performance both during the competition phase and after. These performance measures are vital tools for clarifying expectations, ensuring value-based comparisons, and improving accountability and daily management after final contracts are awarded.

Assuming these four principles are actively implemented by the agency, the only other ingredient needed is an open, fair, and transparent process through which the employee and contractor bids can be solicited and evaluated using these criteria.

Outsourcing Decisions should Emphasize Performance

It is important to be clear on what should motivate an agency to consider outsourcing. Our research showed that cutting costs was often the primary motivator of failed projects and usually not the primary motivator of successful projects. The primary motivators of successful projects include:

Enhancing focus on core mission. The agency turned to outsourcing to clear the deck of extraneous activities so that it could focus on a limited number of functions that were of the most strategic importance to the agency’s mission.

Flexibility and speed. The agency wanted "just-in-time" access to services and products through a vendor relationship.

Improved quality. The agency determined that outsourcing would improve the performance and/or quality of the service.

Access to personnel or skills. The agency found it could not recruit and retain the necessary human capital to continue providing the service internally – or discovered the service was seasonal in nature, making the maintenance of a full-time staff year round inefficient.

Innovation. The agency determined that internal controls or processes that stifled innovation and created inefficiencies could be avoided by removing the service from the public sector.

Studies into cost savings show that well-designed outsourcing usually results in cost savings. At the very minimum, outsourcing provides better performance at contained or in a few cases slightly higher costs. Governments that turn to outsourcing initiatives motivated merely by a desire to cut costs are taking a short-term perspective.  Outsourcing should improve the quality and efficiency of the services that are provided. Cost reductions, when they do happen, should be seen as a welcome side benefit rather than the primary motivator.

The Road Ahead

Similar evolutions of change have happened at the local level.  In Phoenix, once they started measuring the performance of their expenditures (How much do we spend per mile of street paved?  How does that change over time? How does it compare to other cities? How smooth are the roads in exchange?) and provide that information in clear and simple form to all residents, a cascade of institutional changes began.  Performance becomes embedded in all service decisions, including contracting.  Unnecessary or poor performing programs cannot survive the transparency and the scrutiny that follows it. They change or they go away.

Federal agencies are starting down that same path. It may be a long walk, but it will be an interesting one. In California, will state and local governments take the same path?