With public accountability and transparency in the spotlight, the onus is on all levels of government to demonstrate cost efficient and effective oversight of public funds. Judicious use of "Managed Competition" — the opening of public service delivery to private competition — is a strategy worthy of careful consideration.

Defining "Managed Competition"
Managed Competition enables government to test the market for improved service delivery and pricing options by allowing both public and private entities to compete for a contract through an RFP process. Managed Competition does not promote the wholesale transition of all public services to the private sector — it is not a goal in itself, but a means to an end. Managed Competition encourages healthy market-based competition in certain commercial services: those that, in the words of former Indianapolis mayor and Managed Competition advocate Stephen Goldsmith, pass the “Yellow Pages” test:

If the phone book lists three companies that provide a certain service, the [government] should not be in that business, at least not exclusively. The best candidates for marketization are those for which a bustling competitive market already exists. Using the yellow pages test,  [you] can take advantage of markets that have been operating for years. ¹

If properly implemented, Managed Competition, or competitive sourcing, as it is also known, can invigorate service delivery, enhance the general perception of public service, and translate into annual savings in the range of 10-30 per cent. ² The key phrase, however, is “properly implemented.”  Although converting to Managed Competition is not a simple process, the good news is that plenty of working models exist. Managed Competition has been successfully implemented in the UK and across the US at the state level (where jurisdictions including Alaska, Colorado, Kansas, Kentucky, Montana, Utah and Massachusetts have comprehensive regulations setting standards for competitive contracting), and in cities like Indianapolis, Phoenix, and Charlotte, North Carolina, where ambitious programs have been in existence for years. Services where Managed Competition have proven successful include: public transportation, document management, human resource management, fines/accounts collections, refuse collection, park management maintenance, and catering.

In Ontario, the idea of Managed Competition isn’t new. It’s been attempted selectively, most notably at the municipal level. For example, the Regional Municipality of Peel approved the use of managed competition as a procurement tool in 1999. Peel Region’s Public Works Department is now in Year 4 of a five-year plan that evaluates candidate services currently performed by municipal staff and external contractors and tenders selected services to internal staff and external contractors. Six contracts have been completed already, for services including cleaning sewers, grass cutting, waste and recycling haulage and water service installation. Peel Region staff have won four of the six contracts. A conservative estimate (comparing costs of contracts won by internal staff to the next available contractors’ bids) indicates savings of over $500,000 — and no jobs were lost as a result of the process. But in Ontario as in New York State, where the concept has also been tested, “…competitive contracting has not taken root as the preferred approach to providing public services.” ³ In Ontario’s current cost reduction environment — reinvigorated by a new government — exploring Managed Competition on wider basis may be a solution to achieving significant savings and service quality improvements.

A fair challenge to public sector monopolies
The underlying assumption of the “yellow pages test” is straightforward: where multiple private firms are interested in bidding to deliver a particular service, the need for continuing with a government monopoly should be re-examined. To attract competitive and quality bidders, the playing field must be — and must appear to be — reasonable and fair. Private firms should not feel that public entitles have the inside track. In turn, public sector agencies entering a competitive market for the first time must feel assured that bureaucratic pre-disposition and restrictions won’t impede their competitive efforts. Key learning from the post-implementation of Managed Competition programs in various jurisdictions includes the following:

1. It’s not a “one size fits all” proposition. Services and their method of delivery are different, and frequently require unique approaches.  As a report from Charlotte, NC explains, “Some [services] are equipment intensive and some are labour intensive so the same approach in costing, RFP development, performance criteria and gainsharing will not work for all.” ⁴ On the positive side, experience exists for virtually every service — so the time-consuming process of starting from scratch can usually be bypassed.
2. Employees and unions have to be involved from the start. Given their role as key stakeholders in this change exercise, it’s critical—from both a process and substantive outcome perspective — that public sector unions take an active role in the design of any new procurement process. To better achieve buy-in, decisions shouldn’t be presented in a “review and comment” scenario.
3. Performance should be benchmarked. Managed Competition is not simply about replacing one service provider with another for the sake of a change. The determining decision factors are efficiency, innovation and service responsiveness. To better assess results, especially at early stages, initial competitive contracts should be for a portion of a larger market, and for relatively short, measurable periods. Segmenting a service will enable government to consider the lessons of experience for subsequent contracting rounds.

Prudent guidelines for implementing Managed Competition
Undeniably, Managed Competition has its detractors. In some jurisdictions, failed experiments have led to questions about the fundamental advisability of drawing the private sector into public service delivery. Differences in political perspective aside, the relative success of a Managed Competition program rests entirely on a government’s ability to define, adhere to, and monitor clear standards of implementation — with the ultimate goal of harnessing the creative energies that are released in a move away from monopoly service delivery. To increase the likelihood of success, some prudent guidelines for adopting a Managed Competition program include:

Fair competition. True competition, based on a fair RFP process that leads to the identification of the most proficient service provider, is the central requirement. As stated by the US-based Reason Public Policy Institute (California-based Reason is one of America's leading think tanks in the field of re-thinking/re-inventing government) “Competition creates a ‘race-to-the-top’ in almost any undertaking.” ⁵ The gains to the public are directly derived from the quality proposals and implementation that a competitive process is expected to produce from both public and private organizations.

The process for fostering this competition must provide structured and consistent methods for achieving "all-in costing” or “full cost pricing.” The complete cost of replacing or creating public services, including attribution of items like maintenance and capital expense, must be considered. Tax and regulatory exemptions that give the public sector distinct advantage in pricing should be removed. Also, read the article that explores full cost accounting.

Transparency. Since one of the primary objectives of a competitive process is building trust in the government’s management of public funds, transparency is vital.  Information must be easily available to decision makers and to the public on historical cost and outcome/ performance achievements, as well as on sourcing criteria, processes and decisions.

Accountability. Standards, guidelines, and procedures must be agreed to in advance — and must apply equally to public and private service providers. In general, public service employees are not consistently held to a performance agreement similar to a contract. Under a Managed Competition scenario, “if the in-house team wins and they do not perform to promised level or have cost overruns, it can lead to exclusion or points against them in the next round of competition. This greatly equalizes the sourcing process and makes all parties accountable for their performance.” ⁶

Performance. The goal of a Managed Competition process is for taxpayers to receive the highest level of performance for the lowest possible cost. As experienced in Charlotte, “The single most important achievement of Managed Competition has been the development of a culture in which government is run like a business.” ⁷

What’s next for Ontario? 
The new Ontario Liberal government has promised that structural change, accountability and cost effectiveness will be central themes in their administration.  Managed Competition, with its ability to foster innovation, quality improvements, new efficiencies and transparency, deserves further, carefully considered experimentation at this time.

A good first step for the province would be to establish a Steering Committee whose mandate is to develop a “Made in Ontario” approach to Managed Competition. Through the contributions of key technical personnel from target government ministries and outside specialists, such a Committee could draw upon the successes, failures, lessons and practical expertise of the numerous organizations in other jurisdictions willing to share their experience.

Other topics in government:
Full cost accounting: From better understanding to better planning
Public/private partnerships: An interview with a U.K. expert

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¹McMahon, E.J., Moore, A. & Segal, G. (December 2003).  Private Competition for Public Services: Unfinished Agenda in New York State; Civic Report 4 
²Sclar, Elliot. (2004). The Privatization of Public Services: Lessons from Case Studies; Economic Policy Institute 
³McMahon, online
⁴City of Charlotte website. (2004). City of Charlotte Managed Competition Program
⁵DeMaio, C., & Badolato, V. (May 2003). Competitive Sourcing: The Wait is Over, The Time is Now; Reason
⁶DeMaio, online
⁷City of Charlotte website. (2004). City of Charlotte Managed Competition Program