I’ve spent my entire adult life working in business, as an employee, manager, business partner and owner. I also spent a fair number of years as a business magazine reporter and editor, interviewing executives around the country. I like business so much that I still read the Harvard Business Review, more or less for fun.
So I feel qualified to offer this caution to friends who’ve spent most of their working lives in government: Business isn’t magic. When you outsource a government service to a private company, you don’t always get rid of your problems. In fact, most times the problems just come back to you in new forms.
I offer this caution because outsourcing seems to have gained a new life, thanks in large part to the terrible financial crisis local governments have been in since 2008. Today we find cities and states creating public-private partnerships to manage highways and toll bridges, and take over municipal parking services. States are contracting with private prisons to house inmates, and cities are thinking about privatizing water services and sanitation departments.
And then there are charter schools. If you had told citizens in the 1980s that, in a few decades’ time, we’d be using taxpayer money to pay nonprofits and even for-profit companies to educate public school children, they would have thought you were crazy.
Some of this outsourcing has worked reasonably well, some of it has created only headaches, and some of it is so mixed in its results that it’s hard to make sense of it. (Nearly every comprehensive study of charter schools, for instance, says they perform about as well as regular schools.)
This doesn’t mean cities shouldn’t outsource some of their services, but it does mean they should do so with clear expectations about what will happen. The key thing is this: Businesses have to find a way to pay back their investors and make a profit. And as far as I know, there are only three ways of doing that when you are privatizing an established public service. One way can be relatively painless and may even win the city some credit with voters. The other two are likely to stir up a hornet’s nest.
The painless way is through some kind of innovation, which could include changing the service’s delivery process or use of technology, or by repositioning the service in the public’s mind. How could that happen? Think about the rise of self-service gas stations. Until the mid-1970s, it was unusual for people to pump their own gas. (To this day, it is illegal in New Jersey and Oregon.) Why was it so rare? Because most people thought it was unsafe. And, besides, who wanted to stand around on a cold and rainy day pumping gas?
But with the help of a little technology (swiping credit cards at the pump) and some small incentives (slightly cheaper prices at self-service) gas stations gradually coaxed people out of their cars. It worked so well that today you’d be hard pressed to find a gas station still offering full-service even at a higher price.
Could a private company, taking over a city service, do something like this? Sure, if there were obvious inefficiencies and if citizens could be persuaded to change in small ways how they used the service. Take curbside recycling, which is still so new that customer habits aren’t deeply formed. If a company could think of a highly efficient way of hauling recyclables, helped by a change in customer habits, it could take a money-losing service off a city’s hands, pay back its investors, make a profit . . . and leave the citizens pleased with the city’s decision.
Alas, most city services don’t work that way. Yes, there are always more efficient ways of running water systems, patching streets, or managing landfills. And you can change citizen habits with incentives over time. But for most city services, the improvements and resulting savings will be incremental. They won’t be enough to pay back investors in a reasonable period and turn a profit.
So that brings us to the other two ways that companies succeed with outsourcing: They raise prices, cut costs, or both. Don’t get me wrong: This may be exactly what’s needed in many cases. Every three months, I mail my company’s tax returns to the state revenue department and the IRS. (Remember, I’m a taxpayer.) And as I stand at the post office counter, I always think that the price of certified mail is ridiculously cheap. And as for cutting costs, particularly labor costs, which government in America does a good job of this?
But they could. Governments might never be as good at managing labor costs as Wal-Mart or as aggressive at pricing as Microsoft, but they could be much, much better than they are. (And some are getting better. If there’s a silver lining to our hard times, it may be that governments are finally dealing with their unfunded pension and retiree health-care liabilities . . . and maybe getting serious about worker productivity as well.)
In other words, everything that businesses could do to generate more cash, governments could do as well. There’s no magic here: Innovate, raise prices, cut costs . . . or all three. That’s it.
So why don’t they? Because businesses offer governments what looks like an easy way out. Take the deal former Mayor Richard Daley signed in 2009 privatizing Chicago’s parking meters. The business consortium that won the deal offered the city a cool $1.18 billion to take over the city’s parking meters for the next 75 years. The city was in the midst of one of its perennial budget crises, and the money helped bail it out for a year or two.
That’s not what Daley said at the time, of course. He told reporters the city shouldn’t have been in the parking meter business to begin with. “This is not the core business of the city of Chicago,” he said. Really? Managing city streets isn’t the city’s business? Then what is?
What Daley really meant, in all likelihood, was that doing what came next was too hard for his government. The new owners dramatically raised parking rates. The public reaction was fierce, and it only grew only fiercer when the company was slow to deal with jammed or vandalized meters . . . and cars were ticketed or towed as a result.
Sometime similar happened in Atlanta, where the city privatized parking enforcement and meter maintenance, and citizens and store owners howled about the blizzard of tickets coming from the private company.
In these cases and others, there was no magic. The businesses that took over public services did nothing that the governments themselves couldn’t have done, had they set their minds to doing it. So why didn’t they? Because innovating, cutting costs, and raising rates is hard and sometimes unpopular. Governments turned to businesses because they didn’t want to take the heat.
But, of course, they took the heat anyway, in terms of citizen complaints about the privatized services. Today it’s hard to find a politician in Chicago who will defend the parking meter deal. And Atlanta’s city council is desperately looking for ways of making its parking deal work better.
In the end, then, these cities have the worst of all possible situations. They catch the political heat, lose an opportunity to take on the government’s underlying management and cost issues, and give up control of incredibly valuable public assets . . . in Chicago’s case until 2084.
As I said early on, there are cases where privatization and outsourcing work reasonably well. If it’s a small government, outsourcing of back-office operations may be cheaper because of economies of scale or the cost of expertise. (Why manage your payroll if it’s cheaper to contract it out?) But for large governments, that’s usually not the case. Too often, they privatize for short-term financial reasons or for fear of political backlash.
Then they get the backlash anyway. And the money’s quickly gone.