The Responsible Contract Manager: Protecting the Public Interest in an Outsourced World

7. Managing Contracts: The Skills You Need and What Can Go Wrong—Twenty Common Problems in Contracting

Chapter 7 Managing Contracts The Skills You Need and What Can Go Wrong—Twenty Common Problems in Contracting THERE IS an emerging literature on the use of contracts by government and the private sector. Network management is becoming a way of life throughout our public and private economy. A great deal of scholarship has been devoted to analyzing the decision to privatize and to providing advice to decision makers about how and when to contract out (Avery 2000). Murem Sharpe has written that contracting out has become a normal response to economic change in the private sector and that workers have learned to adapt to this new world (1997). George Boyne has analyzed the outsourcing decision by local governments in an effort to understand the influence of fiscal stress, market structure, and politics on the make-or-buy decision (1998b). Osborne and Gaebler (1992) noted the usefulness of contractor competition in improving the effectiveness and efficiency of government organizations, an argument also made by John Rehfuss (1991) when he compared contracting out in the United States and Great Britain. A wide variety of scholars are skeptical about the benefits of contracting out (Harrison and Stanbury 1990; Hirsch 1995; Sclar 1994, 2000). Sclar questions the assumption that contracting leads to cost savings, citing transaction costs and the absence of competitive markets for most of the work performed by government (2000). Others note that while contracting out can save money, it will only do so if a private market exists for the services being purchased (Rehfuss 1991; Johnston and Romzek 1999). Jonas Prager, like Sclar, notes that contracting out should only take place after government analyzes the cost of letting contracts and monitoring performance. Globerman and Vining (1996) also cite the importance of analyzing transaction costs. Prager considers it essential that direct 121 122 Chapter 7 government provision of service be carefully analyzed as an option when considering contracting programs. Scholars have also analyzed the effect of contracting on government effectiveness and legitimacy. This literature has been best summarized and analyzed in Brinton Milward’s pathbreaking work on what he terms “the hollow state” (Milward 1994, 1996; Milward and Provan 2000). Gilmour and Jensen have written of the need to redefine our formal concepts of government accountability to deal with the facts of increased privatization (1998). Bardach and Lesser raise the issue of accountability to particular parties versus accountability for results (1996). In their view, before developing accountability mechanisms one must decide to whom management is accountable and for what government is accountable (Bardach and Lesser 1996). While concerns about the hollowing out of government are important and worrisome, increases in contracting activity are widely reported (McDavid and Clemens 1995; Greene 1996; Light 1999). A number of observers have discussed the need for more sophistication in government contract management (Johnston and Romzek 1999; Romzek and Johnston 1999; Gooden 1998). Whether one favors or opposes contracting out, its growth is indisputable. Those of us in the business of advising and training public managers must learn to understand this management tool and teach public managers how to use it more effectively. The focus of this chapter is to get specific about the obstacles that public managers must overcome to be better contract managers. We have written elsewhere about a “functional matching” approach to privatization and the different attributes and motivational advantages of each sector for different tasks (Cohen 2001). Simply put, government organizations must be used when authority relationships are at the center of the task, such as police and regulatory functions. Nonprofit organizations seem best suited to functions such as health care that have a strong, missiondriven dimension. Private organizations are best when material incentives are needed to assure high-quality task performance. We foresee that public managers will continue to assign functions to nongovernmental organizations. As we noted elsewhere (Cohen and Eimicke 2000a, 2000b) and throughout this volume, the trend toward multisectoral public service delivery creates several critical and difficult opera- Managing Contracts 123 tional problems that must be addressed. Public managers must become effective contract managers and need to learn how to: • Find out what their contractors are doing. • Develop and implement systems of contractor incentives. • Get a fair price for services. • Develop the skills needed to negotiate performance-based contracts. The importance of performance measurement to managing contractors has received a great deal of attention, as scholars have sought to identify the conditions that lead to successful outsourcing...