By Eric Schnurer

Competition vs. Complacency—Let the Best Team Win Doing things the same old way means you'll never catch up to that fast-moving train called the 21st century.

Competition vs. Complacency—Let the Best Team by Eric Schnurer

February 24th, 2015

Shortly after newly elected Chicago Mayor Rahm Emanuel unveiled a plan in 2011 to balance the budget by slashing programs, cutting payrolls and privatizing other services, he issued a challenge to the city unions:  If you don’t like my plans, come up with another way to save as much taxpayer money.

Farming out city services to the private sector was a sore point with many union leaders, especially a decision by former mayor Richard M. Daley to bid out a costly trash recycling program to private contractors shortly before he left office. Chicago’s Department of Streets and Sanitation had been so inefficient in running the program that two-thirds of city residents had never received the blue plastic bins needed to haul trash to the curb. The city decided to award contracts for four of the city’s six recycling zones to the two low-bidders.

The unions took up Emanuel’s challenge. They developed a plan that would save the city $242 million a year in operating costs while also reclaiming the “blue cart” trash recycling program.

(By way of full disclosure, the author’s consulting firm worked on the union report and was subsequently hired by the city’s Labor-Management Cooperation Committee to work with the city and its unions to find further savings.)

At the heart of the labor movement’s strategy was something called “managed competition,” a technique that stands privatization on its ear. It does that, according to Lawrence L. Martin, a professor at Columbia University, by pitting public employees against private-sector firms or organizations for the right to provide services to municipalities or states.

Martin has written that “The major distinction that sets public-private competition apart from privatization is that no a priori assumptions are made about which sector, the public or the private, should provide government services.”

While the managed competition technique has received relatively little attention from government reformists over the years, it is revolutionary in practice. A common refrain of civil servants and their union representatives is that they are often locked out of meaningful negotiations on ways to improve government efficiency and save money. Even worse, when government officials decide to turn to the private sector for assistance, a relatively common practice, they are effectively wiping out government jobs that may never be restored.

There’s no reason why civil servants and their union reps can’t aggressively compete to preserve and improve government services.

The virtue of managed competition is that it empowers government employees and their union representatives and gives them a real stake in their government agencies by enabling them to compete head-to-head with private companies to hang onto their positions.

Overall, $40 million of the $242 million of annual savings that the city unions claimed they could achieve in their submission to Emanuel involved “managed competition.”

Chicago was not alone in pursuing managed competition – or seeing similar results. Phoenix, Charlotte, Indianapolis and San Diego all have impressive records for undertaking managed competition. Again,  in-house government workers have almost always beaten out the private sector.

In short, there’s no good reason why the private sector shouldn’t compete for contracts to provide many government services.  But there’s also no good reason why civil servants and their union representatives can’t also aggressively compete to preserve, and improve government services.

These same observations apply equally to the federal government.  During the administration of President George W. Bush, the federal government experimented with managed competition with modest success.  Unfortunately, as is frequently the case with the introduction of new ideas, politics and ideology got in the way.

Bush came to office with an agenda of promoting “privatization” of government services, contending as many do that private contractors could do the work of government more efficiently and more cheaply than civil servants and bureaucrats.

In a 2003 report, President Bush’s Office of Management and Budget found that less than half the federal government’s 1.6 million employees worked in functions that could be described as “inherently governmental.”  Just over a quarter of federal workers were engaged in activities that included human resources, data center operations, loan processing, maintenance and repair work, library services and graphic design.

“When in-house operations compete they consistently generate cost savings from 10 to 40 percent.”

At the same time, the OMB report asserted that subjecting in-house operations to competition consistently generates cost savings of anywhere from 10 percent to 40 percent on average, “regardless of whether the competition is won by a private contractor or the government.” OMB cited other studies that showed improvements in service delivery as a result of managed competition. This was achieved while, “[on] average, the government wins just over 50 percent of public-private competitions.”

This wasn’t exactly what the president and his advisers wanted to hear, given their predisposition towards contracting out a lot more government activities. But it was hard to argue with their own budget office’s findings. For the next five years, the Bush Administration promoted managed competition in selected areas, although in fact officials began losing interest in the technique after only two years.

Government employees won 89% of the business in the first year and a whopping 91 % in the second.

There are several explanations for this. First, the program became a victim of its success. Government employees not only did well in the competition, they won 89 percent of the business in the first year and a whopping 91 percent in the second. Even though this disappointed privatization’s backers, public workers still objected that the efficiencies resulted in some job reductions. Congress also required that, in order to compete, private firms had to offer savings of at least 10 percent below current government costs. Privatization advocates denounce such restrictions as anti-competitive.

While it lasted, managed competition, applied to roughly two percent of the federal workforce, produced savings of roughly $7 billion over a five- to ten-year period. That’s not much in the context of the entire federal budget (which averaged about $2.5 trillion per year at that time), but it’s not insignificant.

The answer to improving government performance isn’t privatization per se – it’s competition. In fact, one problem with how private contractors are managed by federal executives is that once they get in the door, they rarely face further competition.  A survey by the International City County Management Association found that 75 percent of contracts are given to the incumbent without rebidding.

Not surprisingly, then, the Project on Government Oversight found that while federal government salaries, benefits and especially pensions are higher than private sector salaries and benefits, contractor billing rates average 83 percent more than what it would cost to do the work in-house.

The bottom line?  We can make government both better and cheaper by making it compete – and making it competitive.  So, let the competition begin.