Public-private partnerships

More value through managed services

Public services have traditionally been delivered through hierarchical government bureaucracies. But these days, that vertically integrated model is giving way to a horizontal approach involving a complex blend of federal, state and local government — along with private businesses, third-party contractors and non-profit institutions. In this new model, the role of government is transformed from direct service provider to leader and manager.

These networks are already a fixture at every level of government. Partnering is on the rise in Europe, including a number of public school systems that have hired private firms to build and maintain their facilities and infrastructure so educators can focus on education. In New Zealand, the country's entire highway infrastructure is designed, built and repaired by private firms. In the United States, federal service contracting has grown by nearly 20 percent over the last 10 years. Private contractors, for example, currently support the U.S. military with a wide range of ancillary services, freeing up active duty military personnel to focus on the
core mission.

Political debate tends to focus on whether it’s "right" to replace government workers with third-party contractors, but in practical terms, the real issue is how to make third party government more effective. Many highly publicized contracting failures have been the direct result of government trying to use traditional hierarchical controls to manage a networked, horizontal service model. A new operating model requires a new and different approach.

Key issues

  • Deciding what to outsource: Many leaders make the mistake of picking up the organizational chart, looking for an activity the organization doesn't do well, then outsourcing it — without thinking about what they are really trying to accomplish or the best way a contractor can help.
  • Paving the cow path: Outsourcing should be used as a lever to improve and transform existing systems and operations — not just to shift existing problems onto someone else.
  • Building new walls: Governments often outsource work through a collection of small contracts, essentially replacing existing agency boundaries with new ones between vendors. In many cases, large, integrated service contracts can help prevent conflicts and long-term coordination problems.
  • Letting contract enforcement prevail over common sense: Governments worry about vendors under-bidding a contract then renegotiating the terms once they are firmly entrenched. Yet relationship that rely solely on strict adherence to a contract generally miss the mark — making one or both parties unhappy and leaving significant value on the table. It's important to stay flexible, enforcing the spirit of the contract but adjusting the specific terms to fit the situation.
  • Finding new management skills: Government leaders have traditionally succeeded by advising on policy issues or managing a hierarchy of government employees — not by negotiating deals and managing external service providers. Success in a networked environment requires a whole new set of skills, literally changing what it means to be a public employee.

Strategies for success

  1. Understand what you’re trying to accomplish with outsourcing.
  2. Use outsourcing as a way to improve processes and systems. Don't just push your old problems onto somebody else.
  3. Strike a balance between contract enforcement and common sense.
  4. Use larger, integrated outsourcing contracts as a tool to overcome organizational boundaries.
  5. Get good at managing vendors.

Public and private partnerships in the Netherlands
Tying partner payments to specific achievements and results helps keep everyone focused on the same objectives. Financial rewards and penalties can be linked to a wide range of performance goals, depending on the agency's priorities.

In the Netherlands, several local governments joined together to improve safety and reduce congestion on a dangerous secondary road near Den Bosch. The governments hired a private consortium to design, build and operate the new highway — with payments over the 18-year term of the contract tied directly to specific quality thresholds such as smoothness of the road and how much of the highway is fully available for use at any one time.

The project represents a new level of cooperation between the public and private sectors, requiring a significant mindshift. Responsibilities and risks are shared in a very different manner, which has led to entirely new ways of working.