Thoughts on Outsourcing -- Part II

Last time I talked about how cities started hiring their own workers and some of the reasons behind it. Now let's look at what's going on.

Why Outsource?

Having worked for many years in the corporate world as a manager, I have had to deal with outsourcing on several levels. Traditionally, for most companies, outsourcing is done for two major reasons:

1. A function is outside the core competencies of the company. That is, if you are in the business of building cars, is it really in your interest to also build the radios that go into the cars, or would it be better to let a company whose sole expertise is in radios?
2. You don't do enough of the specific job to make it worthwhile to bring it in house.  You are a printing company, someone needs a book to be bound. The majority of your work does not require bookbinding. So for the few jobs that you get, it's more economically feasible to have it done by an outside source.

When we look at personal outsourcing, we find that there are a variety of other reasons. By personal, I mean the way you and I run our households.
When things are good, we have good paying jobs, and are making ends meet, we might outsource some of the everyday functions such as:

• food preparation (that trip to McDonalds or somewhere better)
• having a caterer take care of that holiday party
• gardening
• light housekeeping (calling in Molly Maids)
• home repairs (painting, landscaping, etc.).

With cities (and where we say cities we might include most government jurisdictions), the initial idea was to save money for taxpayers by hiring employees directly for those services which are "core" to the running of the city just as a business conducts its core competencies. It made more sense to control costs by eliminating the profit that is required when you outsource. The larger the city, the more this made sense. You could, as a larger city, get volume pricing in materials.

While cities (and schools by extension) are taxpayer based and do not involve a need for profit there were savings. In addition, lower wages were often offered. In order to still get qualified workers, cities often would add other benefits to employment to offset the gap between what a person could make in private industry and civic work. Citizen's demanded that they have good, qualified policemen, firefighters, building inspectors, etc. So cities offered job security, and pensions as a "deferred" payment to entice workers. But even then, the total cost of an employee or function was still below that of the private sector because they didn't have to show profits for investors.

Where Did It Go Wrong

Over the years, civic employees negotiated higher wages and better benefits as did all Americans. As wages and benefits increased in private industry, civic employees also negotiated better deals and the cities were more than willing to provide them so that they could keep "top notch" people to serve the public. In some cases, the cities overstepped with promises that may have been ill-advised, including not taking into consideration the impacts of the aging baby boom generation.

As with anything, once you've given something it's very hard to take it away, so as the private sector saw wages stagnate, pension plans disappear, and benefits no longer being offered in the same way they had been, it became expensive for cities to maintain their highly paid, highly benefitted workforces. Even though they were still, all in all, commensurate with the best of private sector.

So how to reverse that trend in an era of "no new taxes." Cities have decided that if they can't take away the benefits, then they'll just take away the jobs! By outsourcing, the city doesn't have to worry about how much those doing the job are paid, what kinds of benefits they have, etc. So outsource vendors can hire the cheapest labor, not offer job security, not offer health benefits, and NOT offer pensions. Supposedly, this results in a cost savings to the city.

Let's Look At The Logic Of This

So a not-for-profit city can not do the same job as a private, for profit, company doing the exact same work. How can this be? There are several possibilities. One is that they somehow can manage things better. How do you mange street sweeping in a way that saves the kind of money that we're talking about? Can a company see extra savings by sweeping more efficiently? Hmmm. In reality, the only way that they can do the same job AND make a profit, is to pay their workers a lot less money. So what kinds of workers do we get when we go to an outsourcing plan? Since workers are getting low wages, one would assume that they would always be looking for an opportunity to advance out of these jobs and you would see a fairly high turnover rate. Since the company that is hired is only in it for the money, and are not committed to our community any more than they would be to any other community, you can't expect to see the same commitment to quality.

It just doesn't make sense to me that you can cut costs by making a profit that you couldn't realize by NOT making a profit. Again, unless you're doing it by taking something away from someone else.

So cities (and government) has decided that outsourcing is good. Well, at least they're outsourcing the extras, right? Things that they only do periodically and that don't require full time attention? Things that city employees just don't have the expertise to do?

No, And this is where I really fail to understand the logic. In our personal lives when things get tight, we often will forego the McDonalds trip and cook at home, buy our own paint and brushes and do a DYI project, mow our own lawn, and clean our own house. But for some reason we're told that in government, when things get tough you go to McDonalds, and hire a gardener. WTF?

In business, sometimes when things go wrong, they do cut jobs and sometimes outsource. We've seen a lot of outsourcing of core competencies to places like India and China in the private sector. The reasons are to side-step US regulations and to go where there is cheap labor, where there is no guarantee to workers of social safety nets (health care, social security), etc. Is this what we really want for our cities? This is something we all need to decide.

Next time What Should We Do?