Step Three: Selecting the Competitive Framework
Performance Based
Once step two is completed, and there has been a management decision is to explore competitive sourcing, the next step is to select the appropriate form of procurement according to the government’s procurement policies. This raises questions such as:
- What exactly is to be competed for?
- Who will be allowed to compete?
- What is the basis on which the competitors will compete?
- How often will the competition take place?
These questions will vary by jurisdiction, but generally they will provide for competition and competitive neutrality.
A number of factors must be considered in deciding how to bundle services for competition. The agency may wish to achieve economies of scale. But it should also be aware that if the size of the contract is too large it might discourage or prevent some businesses from participating in the competitive process.
The contract length should be determined in consideration of the following factors:
- the need for contractors to recoup significant sunk costs; (1)
- the desirability of continuity in client/contractor relationships;
- the possibility of fundamental policy changes affecting service delivery; and
- the need to ensure an effective level of competitive pressure.
Invitations to compete should be public and open to all qualified firms, not only to meet legal requirement but to be sure of getting competitive responses. The flexibility offered by requests for proposals (RFPs) makes it an appropriate technique to manage the procurement competition. The specifications should be framed after consultation with a range of stakeholders, and not be skewed to favor a specific business. It is also a good idea to work with private firms before competitive sourcing occurs. This will help in getting a better understanding of the cost and performance issues likely to be encountered in a competitive sourcing project.
Also, there are several "best practice" guidelines which agencies should adopt to facilitate the competition. These can significantly affect the outcome of competitive sourcing.
- Specify the service in clear and accurate terms, specifically written to be easy to follow.
- Consult both intended clients and potential providers in preparing the specifications.
- Do the same for other aspects of the RFP documentation, such as the draft requests for proposals and contracts.
- Adopt performance specifications wherever possible.
- Include an appropriate mix of incentives and penalties when specifying service contacts.
- Identify any risks involved in a contractual arrangement, and allocate these risks to the party best able to manage them.
A general rule of thumb suggested by some procurement veterans is to have government assume the contractor will not be there tomorrow and to plan accordingly. Obviously, this will not usually turn out to be the case, but it does point out the necessity for contingency planning as part of the opportunity selection process.
Where the sourcing decision provides for managed competition between the incumbent government work force and the private sector, government employees should be encouraged to enter the competition for their functions. If there is a union its members and leaders should be urged to participate. In any case, training (and/or use of consultants) to assist government employees in the development of their entrepreneurial response will help the whole process and can help reduce employee objections to the process. If the employees are successful in the competition, they should supply the services on a contractual basis as they will be watched by unsuccessful firms who would like to supplant them in later competitions.
Effective competition requires competitive neutrality. It requires that all administrative and legal arrangements treat all organizations and individuals in an equal manner. This includes neutrality among public, private and not-for-profit providers. When there is to be managed competition, the request for proposals must be prepared by an organizational unit separate from all aspects of service specification, regulation and proposal evaluation. This will provide a clear distinction between those responsible for providing a service and those who have either policy or regulatory functions for the service, and will avoid giving any player an advantage based on access to information.
There are two hybrid cases in managed competition. First there is the publicly-held private corporation. This is used when the aim is to convert a public enterprise into an organization which is closer in its objective, incentives, sanctions and operational flexibility to a private firm, while retaining public ownership. This requires a government action to permit a public agency or authority to conduct some or all of its operations on a commercial basis.
The second case is the use of an employee stock ownership plan (ESOP). An ESOP is a federally-qualified employee benefit plan regulated by the Department of Labor and the Internal Revenue Service according to guidelines of the Employee Retirement Income Security Act of 1974, as amended (ERISA). (2) ERISA is the enabling legislation and statutory framework under which ESOPs operate.
An ESOP gives the employees of the sponsoring company a beneficial ownership in the company, which is why the employees are referred to as "employee owners" and an ESOP is referred to as an "employee ownership" plan. Increasing interest in combining employee ownership and privatization in other countries suggests that employee buy-outs of government functions are an idea whose time has come. The use of employee ownership and ESOPs as a means of privatizing government services and enterprises is much further along in the United Kingdom, parts of Europe, Russia, Latin America and Canada, than it is in the United States. More than 50 countries have included employee ownership as part of their privatization initiatives.
In the United States, the first ESOP privatization of a government function occurred in 1996 when the federal Office of Personnel Management assisted over 700 federal employees in creating a new ESOP company, called US Investigations Services, Inc. This national ESOP company, based in Annadale, Pennsylvania, now conducts all the personnel background investigations for the federal government which were formerly performed by the government’s Office of Personnel Management. Alan Roth, Deputy Director of Virginia’s Commonwealth Competition Council, led the only state government study of the privatization of state government functions through the development and promotion of employee-owned companies.
Step 3 procedures will develop information about dealing with the contractor. The RFP response as well as the special terms and conditions will become part of the contract. The contract will provide detailed information on financial, supervision, accounting, insurance, indemnity and immunity issues. It will also contain information concerning the enforcement of the terms and conditions. Freedom of information laws will also apply to the firm, depending on how the local law is written. Private firms performing work for the government can expect close scrutiny both from government quality assurance personnel and from the public and the press.
Public Private Performance Analysis
________________
(1) "Sunk costs" are investments, usually of a capital/long term nature, that need a sufficient term of contract to recover the expenditure. The concept is similar to "stranded costs" in the electrical industry.
(2) 29 USC Section 1001-1461. Employee Retirement Income Security Act of 1974.
Disclaimer All Rights Reserved © 2000