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Minnesota 2020 Journal: Outsourcing Costs More Than It Saves

January 17, 2014 By John Van Hecke, Publisher

Outsourcing public services is a conservative article of faith. It’s the conviction that any collective community activity performed by government can be executed by business at greater efficiency, lower cost and higher profit. Despite widespread acceptance of this idea for the past three or four decades, there’s surprisingly little empirical data supporting or even examining the practice. In fact, a growing body of research suggests the opposite; outsourcing not only has a harmful effect but the privatized activity costs more than the public version.

Outsourcing or privatization is the shift of the production of goods and services from public to private organizations. Writing 25 years ago, noted Princeton University sociologist Paul Starr observed that “privatization has unambiguous political origins and objectives,” rooted in the post-World War II conservative challenge to government’s growth. Theoretical adherence rather than outcome evaluation is the movement’s hallmark. It’s better to insist, in other words, on privatization theory’s purity rather than wade into the murkier waters of cause, effect and costly, poor-realized objectives.

The theoretical cases supporting outsourcing is much stronger than the data-driven outcome analysis. In the former’s case, following insistence that outsourcing a community activity will improve service at lower cost, little subsequent analysis is performed. Dismantling the internal organizational infrastructure leaves little alternative for returning to public entity administered activity. The very act of terminating the publicly run work negates the desire to analyze the change’s impact and goal achievement.

In today’s practical Minnesota terms, outsourcing is a public education battle, one front in the conservative assault on public schools. Its targets are school staff, especially school bus drivers and food service workers. But, the same argument for lowering labor and overhead costs by outsourcing support staff can be readily applied to teachers. Following this logic trail, all school functions are best served by the for-profit marketplace. Students and their families get the best education that they can afford. Families with financial means will send the children to the school equivalent of Brooks Brothers. Most families will be educated in the school equivalent of Walmart. The stark difference between the experiences will be further stratified.

The real debate turns on two points that I’ll frame as questions. First, does the public organization save money or at least achieve a more efficient use of its financial resources by dismissing direct employees, replacing them with private contractor supplied workers? Second, does outsourcing achieve a greater social good than continuing publicly provided services?

Educating children requires helping them get to and from school. My grandmother graduated from Mapleton High School because she lived in town with her grandmother during the school week; country kids had to make their way to school. Without public transportation, schooling stopped with the eighth grade in one room country schools. Classroom instruction is an important, central educational element but it’s also part of a complex series of educational and related support activities. The same argument applies to food service, snow plowing, extra-curricular activities and any function that extends past narrowly defined academic subject matter. Absent publicly disclosed financial analysis, it’s not clear whether schools are money ahead or behind by trading direct employment for contract services. We just don’t know. Except in Pennsylvania.

Two years ago, the Keystone Research Center published Pennsylvania-wide financial analysis, comparing school district provided busing costs with bus contract service provider costs. From 1986 to 2008, researchers discovered that bus contractors cost school districts an estimated $225,000 more than if the schools operated their own bus fleets. Despite this this, schools increased outsourced school busing during the study period from 62% of total bus service to 72%.

In Minnesota, analysis by Service Employees International Union Local 284 suggests a similar phenomenon. Although they only examined a single school year, SEIU’s report, “Safe, from Home to School,” uncovered increased bus sub-contracting costs, similar to those revealed by Pennsylvania researchers. The wide-spread use of school bus contractors suggest that school district leaders have no access to financial analysis, disregard existing financial analysis or simply assume that conservative privatization theory is correct. In all cases, Minnesotans and specific school district residents pay the difference between what school district provided bus services could cost and what outsourced services actually cost.

Schooling and for-profit organizations haven’t paired well. K-12 education proves to be far too complex and unwieldy for conventional business practices. Educating kids isn’t the same as making, distributing or selling candy bars yet conservative outsourcing theorists insist the contrary, leading us to the second question about achieving social good.

It’s easier to see social good over decades rather than weeks or months. Eighty years later, Social Security’s positive, stabilizing social safety net impact is unimpeachable. The larger community and family stability loss costs of contracting the Robbinsdale School District’s bus services to private vendors is hazy at best. Increased profitability helps the contract bus company but it’s not a community benefit. More drivers with fewer long-term community connections hurts schools; it doesn’t help them.

Outsourcing aids businesses angling to increase their near-monopoly market status but it’s a sucker’s bet for schools and communities. More detailed financial analysis is required but it’s clear that outsourcing’s sweeping claims of success are greatly exaggerated. Healthy skepticism, even 30 or 40 years late, is welcome. The goal is getting kids to school, safely and prepared to learn, not serving conservative ideology.

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  • David Schmidt says:

    January 18, 2014 at 10:51 am

    This article seems to assume that school district decision makers and local government decision makers don’t understand economics or finance or “risk management” or operations. Rather, according to this author, these decision makers are blinded by ideology and set out to spend more money because it is the “conservative” thing to do rather than what is the best thing to do [the “conservative” principal of as little overall government spending as possible notwithstanding]. There is more to outsourcing than mere spreadsheet dollars. The Pennsylvania study mentioned $225k over about 18 years. Not knowing the total budget, or any other details, the $225k is essentially meaningless. Questions such as up front costs of the District buying or leasing however many busses, building or maintaining repair and maintenance facilities and the master mechanics, liability costs of the District being the sole transporter of children vs. splitting the insurance risk with another company, etc., would have all been factored into the equation. Sometimes companies will pay a bit more for outsourcing in order to have flexibility, contractual recourse for failure to perform, reduced up front capital requirements, and for liability/insurance risk placed on someone else.

  • Tim Gieseke says:

    January 20, 2014 at 8:51 am

    I agree that sweeping claims, by definition, are usually exaggerated, and outsourcing education is neither a panacea nor a sucker’s bet.  Education, like health and environment issues, can be categorized as wicked problems of society.  These are the never ending issues that morph over time on a continuum of societal change.  Put a human on the moon - tame problem.  Put a child through school and onto graduation - wicked problem.

    The assembly line process of education in the 20th century was good enough for the Industrial Era.  Both private and public hierarchical education delivery models had success and failures.  But our world today, the post-industrial era of dig data, social networks and instant communications, will ignore even those successes.  Learning becomes the critical element today, not “having an education”. 

    In today’s education debate, it is the governance of education we fight about.  It is a turf battle between public policy-makers, private policy-makers and public practitioners.  In the fourth quadrant lies the private practitioner; the student.  Solving wicked problems requires a shared governance approach among the four governance sectors.

    The fight among those at the top of the industrial model is the symptom of trying to solve a wicked problem with a tame solution.  This model will not serve students, but industrial era ideologies.

  • Ruth Cain says:

    January 20, 2014 at 11:54 am

    Years ago AFSCME did a study which showed privatized services are much more expensive and less efficient than publicly provided services. A variety of studies have similar results. See
    for a debunking of myths concerning privatization of public services.

    • Tim Gieseke says:

      January 20, 2014 at 9:13 pm

      Unfortunately, the challenge of quoting a AFSCME study is that they are extremely biased in the outcome they desire.  They know what outcomes they want prior to beginning a study and people are smart enough to set up studies for particular outcomes.  You are better off quoting a corporate study on the wonderful benefits of privatization.

  • Tom Larsen says:

    January 20, 2014 at 6:57 pm

    Business is most profitable as “big”. They thrive being big.
    Two factors come into play: “Economies of scale”  the more of any one thing you do or provide, the greater the opportunity for efficiency and there is usually market savings from volume purchasing or market share leverage.

    Government should understand that it will be more efficient and save the consumer money, THE BIGGER they are and
    the savings will not accrue to profit, but to savings or additional service.

    Joining the metro buses AND the statewide School busses, planning to streamline w/ light rail and move to electric power is ‘RE-SOURCING” . RE Think. There is economy of scale! A pot of work any business would love to pull profit from but why would taxpayers want to do that?

    The state is wise to engage in the safety in the diversity of big business in healthcare and institutional food service.
    (Imagine healthy locally partially processed meals for Schools, colleges, prisons, nursing homes, and government cafeterias all delivered in relatively small containers that are carried by local bus. Imagine most of that food sourced locally.)

    It will HURT Wall Street, but it will bring a just relief back to Main St.

    Food, healthcare and transportation will be needed. That you can bet on. The larger scale, the more you can devote to improving systems, and service to employees and citizen consumers. The “outcome” is not profit.

  • cathy says:

    January 21, 2014 at 12:21 pm

    I can remember when our city street projects were all done by the local city dept. They got their hourly wage as they did every day. Now, we have some big private company from another state doing the same jobs for millions more! State road projects are the same- costing all of us millions more with private companies instead of state workers hourly wages.