Study Shows Big Savings from Competitive Sourcing of Government Functions

Published January 1, 2005

A recently released study shows competitive sourcing of government activities has led to significant savings for the federal government. Using baseline costs, the average savings to the federal government was 44 percent over 10 years, for a total savings of $11.2 billion. The report also found few government employees lost their jobs, contrary to the fears of opponents of competitive sourcing.

The study was issued by the IBM Center for the Business of Government. It examined nearly 1,200 cases of competitive sourcing in the U.S. Department of Defense from 1994 through the first quarter of 2004. The activities that were competitively sourced included payroll services, maintenance, and printing.

Competitive sourcing occurs when both government and private-sector providers are allowed to bid on performing government activities. It differs from privatization, where government employees are not given an opportunity to compete for the work.

Began During Clinton Era

The Clinton administration was an early proponent of competitive sourcing. In a report titled “From Red Ink to Results,” presented by then-Vice President Al Gore, the Clinton administration announced it would “make agencies compete for their customers’ business. Wherever feasible, we will dismantle government monopolies.”

Most of the Clinton administration’s efforts focused on the Department of Defense. Clinton also signed the Federal Activities Inventory Reform Act of 1998, which required federal agencies to report to the Office of Management and Budget (OMB) on the number of positions that could be put up for competitive sourcing. In early 2001, OMB reported nearly half of all civilian jobs in the federal government, approximately 850,000, could be competitively sourced.

Bush Expanded Competition

President George W. Bush has continued and expanded the Clinton administration policy of competitive sourcing.

The average savings of 44 percent for competitively sourced activities is largely a result of increased efficiency and fewer employees needed to perform the work. Compared to the number of positions initially studied for competitive sourcing, the average bid had 39 percent fewer employees.

Geoffrey Segal of the Reason Foundation cited one example of improved efficiency in a July 27 commentary on competitive sourcing, published on Reason’s Web site. He wrote that in 2002, OMB “offered the job of printing the fiscal 2004 federal budget to competitive bidding. The Government Printing Office (GPO) turned in a bid that was almost 24 percent lower than its price from the previous year. That was $100,000 a year that GPO could have saved taxpayers any time it chose, but it never chose to do so until it was forced to compete.”

Few Jobs Lost

Opposition to competitive sourcing has come primarily from government employee unions concerned about major job losses and some department managers concerned about losing control of the work. The research, however, showed those fears to be unfounded.

Of the approximately 68,000 civilian employees at the Department of Defense who faced competitive sourcing, the report found only 5 percent, or about 3,300, lost their jobs. The total number of government positions reduced through competitive sourcing, approximately 25,000, was achieved largely through retirements and transfers into other, vacant positions.

The study also found government employees were able to compete effectively with private contractors when their positions were put up for competitive sourcing. Over the 10-year period, private contractors won 56 percent of the competitions, while government employees won the remaining 44 percent.

In recent years, government employees involved in competitive sourcing have become more efficient, according to the report, and have been winning an increasing number of bids. In 2003, government employees were winning nearly two-thirds of all competitively sourced jobs.

Opposition Remains Firm

Regardless of the research results, however, government employee unions and their members remain firmly opposed to competitive sourcing. Carlus Ellerbe, a member of the American Federation of Government Employees, who faced competitive sourcing in his Department of Labor printing shop, voiced his displeasure to Federal Computer Week. Competitive sourcing amounts to outsiders telling the government “they can do it for less, or we’re not doing it efficiently,” he said. “That to me is offensive.”

While not addressing the issue of whether competition is offensive to unionized workers, proponents of competitive sourcing cite the tremendous savings and improved services sourcing brings. A July 9, 2004 letter to Congress signed by the U.S. Chamber of Commerce and the taxpayer advocacy group Citizens Against Government Waste, among others, stated, “Regardless of whether the government continues to perform the service or a private company takes over, cost savings are achieved” through competitive sourcing, and “free market forces [in] government services [are] a catalyst for cost reduction.”

Sean Parnell ([email protected]) is vice president of The Heartland Institute.