Managed Competition for Public Services

From Governing:

We’ve grown weary of debates about privatization, especially those where commentators tell us that it is always good or that it is never good. This simplistic argument is troubling as it leaves out an alternative: managed competition. Instead of simply preselecting private- or public-sector employees, projects can be put out for bid with both groups competing for the work.

One big benefit of this is that it encourages public-sector employees to stay on their toes — without lopping their feet off. “There is a managed competition benefit in encouraging public employees to be more innovative,” says Gene Perry, policy analyst at the nonprofit Oklahoma Policy Institute. It motivates “employees to think about ways to improve efficiency and to have a more dynamic way to pay employees to improve processes.”

Not that managed competition is a panacea. Relying exclusively on the lowest bids can lead a city astray when quality of services isn’t taken into account. “Cities need to be very careful because the devil is in the details,” says Perry. “Competition is sometimes thrown out there as a magic button, but if you go with the low bid [to the exclusion of all other considerations] you may get yourself into big trouble.”

Charlotte, N.C., has been using managed competition for about 15 years. David Elmore, business process manager for the city’s Business Support Services, says he learned to “look not just at low price, but also at how people do the work. We learned to ask, ‘Why is this guy low? What kind of equipment is he running? How big is his crew?’”

Some cities back into managed competition when privatization creates pushback from unions. That was the case in Indianapolis, according to former Mayor Stephen Goldsmith. Goldsmith agreed to hold off on a wholesale privatization effort, and spent time communicating directly with city employees whose jobs might otherwise have been outsourced. “I was impressed with the workers,” he recalls. “They always had good ideas about how to do their jobs better. We did 80 managed competitions. Some were won by public employees and some by private management.”

Phoenix was one of the pioneers in using this technique for services like garbage collection. The city now has a 40-year track record in using managed competition. “In most cases,” Frank Fairbanks, former city manager, reports, “it has proven an effective way of doing business.”

As he describes it, the city created a thorough description of the service it wanted and wrote an RFP. Once the RFP was prepared, the city would publish it and then hold a bidding conference at which potential bidders could critique the RFP. City departments were allowed to bid against the private sector. Fairbanks adds that the city auditor “owned the process. The City Council did have the power to award the bid to whichever company they thought could deliver the best services, but I could not recall a single incident in which they did not go with the low bidder.”

Some observers of managed competition fear that the process might be just a backdoor way to outsource city jobs. That was the case in San Diego when its citizens approved an initiative permitting managed competition back in 2006 [read "Public Workers Bid for Their Jobs"]. At the time, opponents argued that “the initiative was actually a scheme to award lucrative contracts to political allies in the private sector,” according to Keegan Kyle, writing in the Voice of San Diego. Kyle checked around and discovered that all four bids done through managed competition wound up in the hands of city employees.

The theory that managed competition would favor the private sector was also proven to be untrue in Phoenix. “Very early in the process the city lost 80 percent of the bids and maybe retained 20 percent,” says Fairbanks. “But as time went on, it headed toward a 50-50 split. For some two- to three-year spans, the city employees would win two-thirds of them. But it went back and forth.”

Charlotte isn’t doing as much managed competition-based bidding as it did in years past. The reason: It no longer has as many clearly appropriate contracts for which to use it. But leaders there have given the topic a great deal of thought. According to a document produced by that city, managed competition has a number of benefits. One is that it nurtures open discussions between front-line employees, many of whom have a good idea of how to improve efficiency and management. It also “encourages all involved parties to talk about what services they perform, why they do them and if they should continue to be offered in the same way.”

Charlotte leaders discovered another plus: Competition can help to create a heightened sense of employee pride. When a city-run business unit competes with the private sector and wins, “everyone is proud of the team.”