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Curriculum Center Browse Bibliography Build EPacket Pricing Structure Distribution Process Management Control in Nonprofit Organizations
Note on Managing High-Risk Outsourcing In Local Governments
Padovani, Emanuele
Young, David W.
Functional Area(s):
   General Management
   Management Control Systems
Difficulty Level: Intermediate
Pages: 5
Teaching Note: Not Available. 
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First Page and the Assignment Questions:
    Outsourcing is a strategy used by many municipalities in an effort to provide high quality public services at a low cost. The underlying idea is that a city or town can take advantage of the vendor's considerable experience and economies of scale. The result will be comparable or better quality services than provided by the municipality itself, at a reduced cost to taxpayers, while still allowing the vendor to earn a reasonable profit.

    During the past three decades municipalities in both the U.S. and abroad have undertaken such disparate outsourcing activities as animal control, legal services, fire protection, trash collection, health care, snow plowing, building maintenance, bill collection, data processing, street cleaning, street repair, and recycling. Unfortunately, outsourcing has not always achieved the dual goals of high quality and reduced cost. In part, this is because of poor management of the vendors.

    The way a municipality must manage its vendors depends on the risk associated with the outsourced activity. The purpose of this paper is to present two frameworks that can assist a municipality in outsourcing. The first is designed to assess the nature of the risk associated with a potentially outsourced activity. The second, where we place most of our emphasis, comprises techniques that municipalities can use to manage the vendor of high-risk outsourced activities.

    In this regard, it is important to note that many municipalities tend to avoid high-risk outsourcing. Yet, just because an activity is high risk is not a good reason to avoid it; rather, it must be managed differently from a low-risk outsourced activity if it is to achieve cost-effective results for the citizenry.


    The nature of risk in a potentially outsourced activity can be viewed from three perspectives: citizen sensitivity, supplier market, and switching costs.

Citizen Sensitivity

    From the citizens' perspective, a municipality's sanitation service clearly is much more important than, say, its publications department. Citizens are very concerned about the timely removal of waste and only minimally concerned about printing quality. In large part, this is because they are the final clients, such that, for the municipality, the risk of non-performance is much higher. As a result, any external outsourcing decision must weigh the impact of poor performance or non-performance on the municipality's citizenry.

Supplier Market

    Competitiveness in the supplier market ranges from many potential suppliers (high competition) to few or perhaps only one potential supplier. For example, there usually are many printing companies competing for a municipality's publication business but there may be very few vendors offering sanitation services or nursery schools. With only a few potential vendors, the municipality's ability to negotiate with them is low.

Switching Costs

    Occasionally, outsourced activities are carried out using some unique resources, which cannot be transferred easily from one vendor to another. When this happens, a municipality will have difficulty, and no doubt incur substantial costs, in replacing an existing vendor. For