MANAGED COMPETITION: A TOOL FOR ACHIEVING EXCELLENCE IN GOVERNMENT
Jurisdiction: Federal Government, State Government, City/County Government, Non-Profit Sector, International, Private sector
Management Issues: Competitive Government
A TOOL FOR ACHIEVING EXCELLENCE IN GOVERNMENT
"There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initiator has the enmity of all who would profit by preservation of the old system and merely lukewarm defenders in those who would gain by the new one." "The Prince" - Machiavelli
Competition is the driving force of excellence. Would Roger Bannister have broken the four minute mile barrier without the competition of other runners? Our national commitment to land on the moon was spurred on by the fact that the Russians had the first satellite in space.
These are examples of a commitment to compete that has inspired performance above and beyond that which has been accomplished in the past. Whether it be in sports, international affairs or business ventures, competition has been a driving force that results in continuous improvement. This driving force can also influence government to meet the challenges of today and the future.
To many, the challenges facing government are perceived as a threat. The normal reaction is an over-reaction. "Privatization" has been a threat to public agencies in the past because the competition process has been limited to private firms competing to take over public operations. The public employees in many cases, have been faced with the potential of layoffs and "downsizing" as a result of privatization being forced upon them.
The natural reaction of those who will be impacted, is to fight back and be very critical of all privatization efforts. Some see themselves as swimmers in a sea of change, with private firms as the sharks competing among themselves to see who gets the first bite. There seems to be little opportunity for the public employee to come out a winner in what they perceive as a one sided battle.
When public employees are allowed to be a competing party, competition, can provide an excellent opportunity for employees caught up in an entrenched bureaucracy, to "challenge the system". In many cases of government inefficiency, it's not the employees, it's the "system". Most government bureaucracies have evolved over a period of time that has produced rules, regulations, policies, practices and an organizational culture that supports "the way we've always done it".
What government agencies lack is a competitive process to challenge the systems they are forced to operate under. With such a challenge, they can establish a "level playing field" and compete with private firms to provide the taxpayers with the highest level of service at the lowest cost.
One of the greatest benefits of the competitive process is the ability of the public agency to positively influence expectations about local government and gain public support. A properly designed competitive process can enable the public agency to deliver services as capably and efficiently as any private vendor.
Another benefit of competition is a "self directed" attention to cost and customer satisfaction. Discussions of unit costs, customer complaints, down time and other related issues occur within the government organization. The direct competition with outside firms forces reduction or elimination of bureaucratic reporting, complex regulations and oversight activities.
Real competition forces a proactive approach that focuses on results rather than process. Continuous cost reduction is a major benefit of the process. Each bidding cycle produces positive change from both the public and private competitors. They learn from each other and the result is a more productive operation with reduced costs.
A major benefit of the competitive process is the team effort of labor and management working together to challenge the system and improve productivity, in order to win in competition with private sector firms. Each team member, while maintaining support for the group they represent, must maintain a primary focus on the customer utilizing the services they provide. Each individual participating in the process has the opportunity to initiate a "paradigm shift". Existing rules, regulations, policies and past practices are challenged to ensure that all future activities are undertaken, utilizing the most current and applicable methods and practices that will produce a high level of productivity. The "test" for this process is to have each participant answer this question: "If this were a business and you owned it, what changes would you make?
MANAGED COMPETITION IN ACTION
"Our Public Sector can learn to compete, or it can stagnate and shrink until the only customers who use public services are those who cannot afford an alternative" -- "Reinventing Government" - Osborne/Gaebler
The evolution of the competitive process in government is referred to as "Managed Competition". This is defined as the process in which a public agency competes with private firms for the provision of public services under a controlled or managed process that clearly defines the steps to be followed and the roles of all the participants.
The concept of Managed Competition was pioneered by the City of Phoenix, Arizona in the late 1970's. The initial efforts were in the field of solid waste collection that involved multi-year multi-million dollar contracts. After losing several bids, the city's Public Works Department sharpened it's competitive skills by challenging the system, utilizing new technology and learning from private firms. After an initial loss of one half of the solid waste collection districts, the Public Works Department increased it's productivity and rebounded over a period of time, by winning back all the contracts previously lost to private firms. This success story has generated a national and international reputation for the City of Phoenix and provided guidelines and inspiration for numerous other public agencies who have successfully established programs of managed competition.
The following is intended to be guide for those public agencies that are considering new approaches to reduce costs and maintain high levels of providing public services. For those considering Managed Competition, the answers to the following questions may be helpful:
Who is "Managed Competition" for?
It is for those who are not in favor of privatization per se but want to insure that their costs are lower and their quality of services is improved.
What is the theory of "Managed Competition"?
The theory is, that if private firms can reduce costs and still make a profit, then government departments operating in a competitive environment, should be able to reduce costs even further. (Competition is "The American Way" - "Productivity Improvement" is the result)
What results can be expected?
"Managed Competition" should provide an improvement in service quality while reducing costs and improving employee morale.
Why are public agencies moving toward "Managed Competition"?
° Erosion of service ° Scarce resources ° Diminished public respect for government services. ° Pressures from the private sector ° Political issues ° A force for change ° Downsizing/rightsizing
What services provided by government fit the "Managed Competition" model?
Those that are quantifiable and presently being provided on an open market basis by private firms to other customers, both private and public. The following are examples of some of the services utilizing this process:
° solid waste collection and disposal ° ADP Operations ° Custodial services ° Facility Operations ° Printing services ° Day care ° Street sweeping ° Social Services ° Security guards ° Billing and Collection ° Landscape maintenance ° Property Management ° Utility billing ° Vehicle maintenance
Who implements Managed Competition?
Implementing a program of Managed Competition can be undertaken by one of two methods.
° Elected official initiated -- This process is usually politically motivated and has an elected official such as a mayor or governor, in a leadership position, who provides a driving force that obtains political support. This process can take place in a short period of time and is very visible to the public with extensive media coverage. (Examples: Cities of Indianapolis and Philadelphia and the State of Massachusetts)
° Staff generated -- This approach is more of an evolutionary process. A pilot low key project is evaluated by staff and a competitive process is developed over a period of time. Each step is carefully worked out and credibility is obtained. The process is gradually incorporated into the organizational culture. This method takes considerably more time than the politically driven process. (Example: Cities of Phoenix and Charlotte)
What are potential variations in a competitive bidding strategy?
The "Managed Competition" process can utilize a range of competitive bidding strategies that include:
° Ad Hoc Approach -- Under this approach, in-house costs are compared with the market prices being paid for the same or similar services. If the comparison does not prove favorable for in-house services, the following alternatives can be considered:
° Give staff a fixed time to improve operations and reduce costs. ° Go to informal bidding between department and private firms. ° Go to formal bidding between department and private firms.
° Informal Bidding -- In this process, fixed prices are received from private firms for specific services and they are compared with cost estimates of in-house provision of the same services. This can be done with invitation for bids (IFB) or request for proposals (RFP). One of the problems with this process is that the bids from private firms are fixed and the in-house cost is only an estimate and does not follow specific guidelines or specifications.
° Formal Bidding -- The formal bidding process under Managed Competition makes a fair and equal comparison between bids submitted by private firms and in-house departments. Both public and private bidders utilize the same specifications for providing the service. (This is the process that was developed by the City of Phoenix over a period of time)
What is the Role of Cost Analysis?
Preparation of the in-house bid is a process that receives great scrutiny by private sector firms. The most common allegation is that all costs are not included in the in-house bid. The terms used refer to "fully allocated" costs and "incremental" costs. Fully allocated costs contain overhead and other charges that are incidental to the services being provided.
The City of Phoenix uses the "go away" cost analysis. Under this approach, the primary factor is the impact of contracting on the department budget. The city's bid is determined by evaluating what city costs would "go away" if a private firm were awarded the contract and then calculating the city's cost of providing those go away elements. This process has gained credibility over a period of time as having the best evaluation of the impact on the taxpayers receiving the services.
Costs that can also be considered are contract administration costs and transition costs. The cost of contract administration can be added if it can be accurately projected in advance. It is included in the "go away" cost analysis. The question of transition costs can be debated and is a matter of policy as to whether personnel and other costs related to a change in service provision should be included in the bid process.
The key to a bid with credibility, is the requirement that it be prepared or certified by an independent third party or "cost referee" without a vested interest in the outcome of the bid process. This can be done by an independent auditor or a special committee appointed by the governing board.
What are the advantages of Managed Competition?
There is a movement toward Managed Competition because it has some advantages not provided by a pure privatization effort. The following are a few of the advantages that have been identified by those using this process:
° Competition challenges the system and "the way it's always been done". ° Employees have a fair chance to win. ° A win by the public agency will improve employee morale and build community support. ° This process provides the management team with another tool to improve performance. ° Labor and management can work together to beat the "common enemy", private firms. ° Private firms will submit better bids if they are competing with in-house bids. ° Customer service is a primary focus. ° Productivity improvements support the development of innovations and the acquisition of new equipment and technology. ° Employees become team players with a common goal of winning. ° The introduction of new methods supports additional employee training. ° External competitors must continuously improve to meet the challenges of the new internal competitor. ° The expansion of the competition process supports continuous internal improvement and supports "reengineering" the system.
What are the disadvantages of the competitive process?
° Many public agencies do not have cost accounting systems and do not know the cost of their product or service and are therefore unable to effectively compete. ° The R.C. factor (Resistance to change) ° If internal labor costs are higher than in the private sector, wage reductions or layoffs may be necessary in order to compete. ° Once a service is lost, it may be difficult to win back due to the need for capital to support new equipment or technology. ° Managers may not be supportive due to their concern for lack of control and the negative impact on their status and compensation. ° There may be a negative impact on labor relations and employee morale if bids are lost.
What are the specific steps in establishing a program of managed competition?
° Establish financial and operating goals to be achieved. ° Review labor relations issues and involve the labor unions in the process. ° Identify efficiencies and inefficiencies of existing programs. ° Determine accountability and responsiveness of existing systems. ° Evaluate cost accounting and budgeting systems. ° Determine which services should compete and which services should not, based on criteria established by those responsible for setting policy for the public agency. ° Determine which services have "A level playing field" (The ability to compete with private firms without major changes) ° Start the managed competition process with low budget internal activities that are ready to compete. ("Pick the low hanging fruit") ° Develop performance measures and a monitoring plan for either outcome. (Public or private) ° Evaluate the competition. (Determine marketplace interest and ability to compete) ° Learn from others (Benchmarking with leaders in the field) ° Evaluate new methods and technology. ° Update the bidding process and procedures to support internal/external competition. ° Establish an independent committee or board to analyze the process and to review awards. ° After bid results: "Let the chips fall as they may". ° Celebrate in-house victories with strong employee support and incentives.
How can management be incentivized to change?
The resistance to change is common to all groups participating in a managed competition process, however, managers tend to quietly resist rather than expressing open opposition that can be expected from employee unions. The managers will view the possibility of losing a bid in a managed competition process as a threat to their future compensation. In most units of government, managers salaries and compensation plans are based on three primary factors. These factors include: size of budget, number of employees supervised and span of control. If a manager were to lose a bid, there would be a reduction in budget because a contract would not be awarded unless there were a dollar savings involved. If a portion of the operation was contracted out, there would be a reduction in staff that report to the manager in question. Whether it is true or not, most managers perceive a loss in their span of control if they convert from direct supervision to contract administration. All these factors would lead managers to realize that their future compensation may be at risk.
The solution to the manager's dilemma is to pay managers on the basis of their worth to the organization. This can be done with a MBO type plan (Management by Objectives). Under this arrangement, the manager works under a plan that relates directly to organization goals and objectives. They are paid based on how successful their operation is, rather than the size of their "empire". In the City of Phoenix, managers operate under a program of "performance achievement" that supports innovative efforts in managed competition.
Copyright 1995 by Ron Jensen, all rights reserved Ron Jensen