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Tender truths: The real costs of letting the private sector deliver public services

Public policy experts Prof John Alford and Assoc Prof Janine O’Flynn discuss the hidden costs and long-term effects of outsourcing important public services to for-profit firms in the private sector. Presented by Jennifer Martin.

"What's happening in the UK through 2011, 2012, under extreme budgetary pressures - we see this tendency for local councils to bring their services back in, so that they can very closely manage them on a costs basis. That goes against all of what we heard for the last 20 or 30 years on why they should go out." -- Assoc Prof Janine O'Flynn




Prof. John Alford
Prof John Alford

John Alford is Professor of Public Sector Management at the Melbourne Business School (MBS), University of Melbourne and at the Australia and New Zealand School of Government (ANZSOG), where he is on a full-time secondment. His MBA and PhD are from the University of Melbourne.

John plays a key role in teaching at ANZSOG, both in its Executive MPA and executive programs. He is a member of the editorial board of the American Review of Public Administration. In 2007 he was made a National Fellow of the Institute of Public Administration Australia.

His research, published in a variety of international journals, focuses on strategic management in the public sector, contracting and partnering, public managers’ political astuteness, and client-organisation relationships. His article ‘Towards a New Public Management Model: Beyond “Managerialism” and Its Critics’, Australian Journal of Public Administration, 52(2), June 1993, was the winner of the Institute of Public Administration Australia prize for ‘the most important or most influential article’ published in the journal.

His previous book, Engaging Public Sector Clients: From Service Delivery to Co-production, Palgrave Macmillan, 2009, was the winner of the American Society for Public Administration’s Award for Best Public Administration Book of the year.

Assoc. Prof. Janine O'Flynn
Assoc Prof Janine O'Flynn

Janine O'Flynn is an Associate Professor at the Crawford School of Public Policy, Australian National University and an adjunct faculty member at the Australia and New Zealand School of Government (ANZSOG). She holds a PhD (2004) and a Bachelor of Commerce (Honours - first class), both from the University of Melbourne. Her expertise is in public sector management, particularly in the areas of public sector reform and relationships. Currently she is engaged in a multi-year collaborative project with the Australian Public Service Commission to co-design a performance management framework to enable high performance government, a key aspect of the Ahead of the Game blueprint for reforming the Australian Public Service. She recently published Rethinking Public Service Delivery: Managing with External Providers, co-authored with John Alford, which explores how government organisations can work with other providers, in various modes, to deliver public services.

Credits

Host: Jennifer Martin
Producers: Kelvin Param, Eric van Bemmel
Audio Engineer: Gavin Nebauer
Additional Research: Lydia Massang
Voiceover: Nerissa Hannink
Series Creators: Eric van Bemmel and Kelvin Param

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VOICEOVER 
Welcome to Up Close, the research talk show from the University of Melbourne, Australia. 

JENNIFER MARTIN
I'm Jennifer Martin. Thanks for joining us. What services should a government provide for its citizens, and which should it let the private sector do in its stead, and how can outsourcing those services be done without compromising quality or handing too much power over to for-profit companies? Public service delivery may sound like a dry bureaucratic phrase, but not when we pause to think of the central role of public services in the aftermath of 9/11, Hurricane Katrina, or the 2011 tsunami in Japan. So, when should a government turn to the private sector? US conservative activist, Grover Norquist, said he'd like to reduce government to the size where he can drown it in the bathtub. His views were informed by Nobel Laureate economist Milton Friedman who advocated controlling the government the way parents manage spendthrift children; by cutting their allowance.So, when it comes to government outsourcing its services, the conventional wisdom is that the decision should be based upon a cost benefit analysis. But today's guests say this is only part of a vital larger equation. They've taken a refreshingly pragmatic approach and developed a blueprint that also considers strategic and relationship costs. In the studio with me is John Alford, Professor of Public Sector Management in the Melbourne Business School at the University of Melbourne. He's joined via Skype from Canberra by Janine O'Flynn, associate professor in the Crawford School of Public Policy at the Australian National University. Together, they have written the book Rethinking Public Service Delivery: Managing with External Providers. John, Janine, thank you both for joining us.

JOHN ALFORD 
Good to be here. 

JANINE O'FLYNN
Thanks for having me.

JENNIFER MARTIN 
Now, first of all, Janine, I'd like to begin with asking you, just why does the public service matter? And what is the highest duty of government?

JANINE O'FLYNN
Well, of course, many people have very different views on this. And for us, as scholars interested in public management and service delivery, the ultimate aim of government, from our view, is to create public value. This really wraps around many of the ideas that we're interested in, in public service delivery. What is the value that's delivered to the citizenry, not just to individual clients or customers that front up to government organisations - but what is it that gets delivered to the citizenry of a particular country or state or community, and how we think about doing that. 

JENNIFER MARTIN
So, we're talking about the values of a government and a society.

JANINE O'FLYNN
Well, we're talking about a couple of different things - not just the values, the sort of moral code that might guide government, but the actual value that gets delivered to a community. In the private sector, we think about the delivery of private value; what are the things that customers receive from businesses, and what is the private value that shareholders get from that particular set of exchanges? In the public sector, what we do is something quite different. We deliver services to individuals or families in communities, and they get some benefits from that, but we do that in pursuit of bigger, broader goals of a particular community, and that's something that we talk about as the delivery of public value.

JENNIFER MARTIN
Now, your book, Rethinking the Public Service, is a how-to manual for managers on outsourcing. There's even a flowchart to help with that decision process. But governments work with the private sector every day, so why do you think they need such guidance on this - John?

JOHN ALFORD 
Well, indeed, it has always been true that governments make use of parties external to government to deliver services. But I think what we've seen in the last 20 or 30 years is a dramatic increase in the extent to which that happens, and we've seen this with the moves towards privatisation, outsourcing - what's sometimes called the new public management, the general objective of which is to make the public sector more like the private sector.

JENNIFER MARTIN
So, the first crucial task, then, of any government in this process is to decide what it wants to deliver to its community. So, John, what does it need to consider when it's making those decisions? 

JOHN ALFORD 
Well, it needs to consider firstly, as Janine said, that the value that's delivered to the citizenry - if you like, the goods that are consumed collectively by the citizenry. But it also needs to consider how much it's going to cost to deliver that value. So, there's nothing profound in that; we're thinking about what benefits there might be for the citizenry, and what might be the costs. But we're talking about a wider set of benefits and costs than the traditional ones of better service for a cheaper price. 

JENNIFER MARTIN
And what are these things that you're considering? 

JOHN ALFORD 
Well, we think that, when you look at the benefits and costs of getting a party outside your government organisation to do stuff, that you need to think of three things. One is what we call the service costs and benefits, that I've just described, but then there are two other kinds. One is what we call relationship costs and benefits - and they come from the fact that services don't just fall out of the sky. Someone has to actually say what services need to be provided, get someone to do it, check that they're doing it well, and apply penalties and rewards if they're not doing it properly, and get them to perform properly. And those things actually have a cost to them, and in particular, they can be easier in some circumstances and harder in others. The other kinds of benefits and costs are what we call strategic ones. And these are when the organisation that is getting an outside party to do something is itself affected in some way by getting that outside party to do it, either in terms of its standing in the community or in terms of the competencies and capabilities that get affected by that.

JENNIFER MARTIN
Now, that's a really interesting area we're getting into there. The reason a government often gives to justify outsourcing is that it frees it up to focus on their core functions, which is a very loaded term. So, could you help us define, what are core functions and what are the risks in this definition?

JOHN ALFORD 
Sure. Core functions are, indeed, a tricky thing to nail down. They are in private business as much as in government. They can embrace a few different kinds of things. One way that some people think of core functions is, the function of being the buyer or the purchaser of services - that is, the person who says what's wanted, and gets someone to do it, and pays for them. They are sometimes referred to as the principal, whereas the agent is the external provider. So, one view is that the core function of government is simply to be a good capable buyer. It turns out that, in fact, some governments are starting to outsource that function as well, and that's one of the ones that we think really needs to be thought carefully about before that happens.If you want an example of this, recently the state of Victoria in Australia, its road authority - road and construction authority - announced that it was going to outsource a number of functions. One of the functions they planned to outsource was contract management; the very function of checking whether external providers are doing the right thing. Now, if you're assuming that external providers are motivated by the profit motive - you know, they are trying to maximise their return - then, if they can see a situation where they can take advantage of the power to specify and monitor and all of that sort of stuff, then they will do so, and that's a big risk for government. It means we don't just fail to get the value we hope for, we actually get ripped off. 

JENNIFER MARTIN
Now, that brings me back to the quote from US conservative Grover Norquist saying he'd like to reduce government to the size where he can drown it in the bathtub. But then there's George P. Lakoff, who is the professor of linguistics at the University of California, Berkley. He wrote The Political Mind: Why You Can't Understand 21st-Century American Politics with an 18th-Century Brain, and in it, he said that the danger in privatisation is that the profit motive may intervene and undermine the moral mission. So, we need to look no further, of course, than drug companies faking data for the sake of profits. Janine, I'd like to get you to respond to that.

JANINE O'FLYNN
Sure. I mean, there's plenty of examples around the world that we see where these sort of issues emerge. Once we start to try and incentivise these actors to deliver and perform to particular sets of targets, for example, we can get into all sorts of problems. I mean, part of it is how we understand the basis of motivation and how humans behave. And if we actually believe that all humans are self-interested utility-maximising actors, as our colleagues in the economics discipline do, then we can't be shocked, in a way, that sometimes they engage in behaviour that might be against some of the principles and values of government. We have very different motivating forces, potentially, in those sectors. We have potentially very different motivating forces in those areas, and sometimes, if we can create arrangements where those parties can work well together, then both parties can pursue their interests without affecting those of the others. There was an excellent example of this in 2012, on some potential gaming behaviour, we call it, in the aged care service provision in Australia, where we see the reclassification of old people who are receiving care in nursing homes up to higher grades of immobility so that providers can collect higher returns. But none of those returns are being fed back into the actual delivery of services for older people, many of them vulnerable in this environment. So, there's all of this potential, I think, for gaming. But if we believe that people are rational, self-interested actors, then it should come as no surprise that they might behave like that. The big job, I think, for government in that environment is, how do we create one to try and restrict that behaviour; to try and align the incentives and mission of those private sector organisations with those of government? And one of the ways that we can do that is to try and use very different types of relationship forms. So, when we can get into much more collaborative modes of working, when we can actually look at how to connect to different motivational bases, not just self-interest, and use different instruments to do that, we have a much better chance, I think, of trying to align the values and behaviours of actors in both those settings. 

JENNIFER MARTIN
This is Up Close. I'm Jennifer Martin, and our guests today are John Alford and Janine O'Flynn, who are experts in public sector management. Now, Janine, I would just like to ask you, what happens when we get the match between motivation and motivators wrong?

JANINE O'FLYNN
Well, we certainly see many examples of this around the world as well. There's some very interesting work that has been done, experimental work and also looking at practice, about this issue called the crowding-out theory. Basically, this is a really nice example of when individuals who are intrinsically motivated, who get reward from carrying out activities rather than just pursuing some bonus or reward at the end of that - when we start to try and reward them with material things, we actually reduce their motivation. A really excellent example of this is the area of blood donation. A very famous book written several decades ago by Richard Titmus called The Gift Relationship - and he made the argument that, if you started to pay people who donated blood, that you would actually get a reduction in the supply of blood donations. Now, economists thought that this was quite crazy, and that if you increased the price for people, they would, of course, give more blood. But now, we've seen several decades of research looking at this, and what we find is that when people are driven by non-material motivations, they actually react quite badly to the introduction of material types of reward. I think we also see this in areas like cheating in teaching environments - so, if we start to reward schools for higher test scores of students. We've seen great examples in Atlanta in the United States in 2011 - an enormous scandal erupted about the use of particular types of incentive structures for teachers, where teachers were found to be adjusting students' test scores and their actual tests, so that the school could get bigger rewards, both for the school and also for individual teachers. In the end, the terrible outcome, of course, was that the students who were not performing very well didn't get the remedial assistance that they needed for several years. The longer-term outcome, of course, is a less educated student population, reputational effects - John talked about strategic costs previously. But these are big reputational effects for a school system, for a government, and a group of students who have never been given the assistance that they needed. Why? All because we got the incentive structures wrong. We drove particular sets of behaviours. 

JENNIFER MARTIN
The overall cost of it has actually eroded that to the point where it's going to cost more to get it all back. 

JOHN ALFORD 
It could well do that. I was aware, when one of the states in Australia was requiring its local councils to market test - that is, put out for competitive tender - up to 50 per cent of their budget. Some councils began to think about whether they should do that with Meals on Wheels, which is a service that's known of, I think, in various countries around the world, where elderly people are brought meals on a daily basis, but more importantly, they also get a chance to have some human contact, for someone to check that they're okay. When it was announced that some councils were considering this, some of the volunteers who did this Meals on Wheels work basically said, we didn't sign up to help a company make profits, we signed up in order to help old people. And very quickly, the councils backed away from that.

JENNIFER MARTIN
So, once a government outsources - this is what we're talking about here - it must ensure the quality of the service. And Janine, you're saying we need to look beyond a carrot or a stick approach, which has been used in the past. Now, why do we need to do that, and to what do we move? 

JANINE O'FLYNN
Well, part of the challenge in only looking at carrots and sticks is that we don't take advantage of the full set of different types of motivators that we have, different instruments of government. So, if we go back to the idea that everybody is self-interested, then perhaps carrots and sticks work. But in fact, we're much more motivationally messy, and individuals do things for lots of different reasons. So, if we look to very different types of instruments to try and get external actors to contribute to our outcomes, then, in fact, government can do things in a much more sophisticated way. One of the recent examples I saw of this was experimenting in the United Kingdom with local government looking at how they would get individuals to recycle more. What they did actually was a combination of different instruments. On the one hand, people are much more likely to recycle if they can see some public benefit for that, so they actually get motivated by thinking they are contributing to some bigger picture issue. But they combined that with actually using a bit of material reward. So, they started a scheme where, the more people recycled, they collected these points, which they could then go and use in local shops. So, it had a sort of carrot on the one hand - it was trying to entice people through a material reward - but it was also using an education and an information program to try and encourage them to contribute to the bigger, broader public good that recycling has. So, actually, what we see, I think, in quite sophisticated government approaches to doing this is not just a single instrument or motivator, but looking at how you can combine them to try and encourage people to behave in different ways, and motivate them to contribute to the broader efforts of government. 

JENNIFER MARTIN
That phrase you said, motivationally messy - that's what people are. I think that captures, doesn't it, what your book and your writing is trying to encompass? It's the complexity of what motivates us, what we define as important, and how we deliver that. 

JANINE O'FLYNN
Absolutely, and we see that once we get into understanding this in a much more sophisticated way than I think we have in the past. On the one hand, we had some writers saying that we are all self-interested utility maximisers. This tends to be the basis of understanding human behaviour in economics. And then, at the other extreme, the idea that people are very altruistically motivated, and this became sort of an either/or equation, I think, in a lot of ways of thinking about motivation. But in the book, John and I work through a much more complex set of motivational bases, and in doing that, we can match up some different motivators. For example, one of the very interesting areas is how public praise and shaming can affect people's behaviour. An excellent example of this used in many places around the world is in restorative justice. So, particularly young people who engage in some criminal behaviour might, instead of going through a court system, actually be placed into an environment where they speak to the victims of the crime, where they are forced to confront the effects of their crime. In a sense, it's a shaming activity, and there's considerable research to show that this leads to reduced crime, and courts around the world have experimented with this as a very different way of applying justice. But we see this emerge also in areas like league tables for schools, or for hospitals in the United Kingdom. Nobody wants to be at the bottom of the league tables, and part of the motivation that comes from going up that is reputational. So, we can use a whole range of different instruments to try and get contributions to public services, if we understand this motivational messiness and complexity in a much more sophisticated way.

JENNIFER MARTIN
So, we've had this focus on the individual and their motivation. Can we move now to the other end of the spectrum, outsourcing compliance to those who are regulated? Let's look at the company compliance. It's great for the sole owner of a small business like a stallholder, but can it be applied to complex organisations and regulatees? 

JOHN ALFORD 
Yes, it can, with some adjustment to take account of that complexity. The fact is that a number of surveys have shown that, if you look at business executives, they actually have - just as Janine has said about individuals - they, as individuals, have more complex motivation. In particular, they are worried about reputation, and it has been found, for example, that an emphasis on shaming of businesses that have been doing the wrong thing is often more telling than some large fine, or something like that. Given that these business people are key people in their organisation, then they affect how their organisation responds. Another that's also interesting is, in areas where you have someone who is responsible for the compliance function, and therefore has relationships with the regulator - for example, health and safety officers dealing with occupational health and safety agencies - they begin to get more of a perspective on the importance of health and safety, and will sometimes have a stronger relationship with the regulator than they will with their own organisations. Smart regulators will seek to capitalise on that identification. 

JENNIFER MARTIN
So, you also challenge the use of sanctions. Can you explain why you see them as so problematic?

JOHN ALFORD 
Well, it's not so much that we see them as problematic, as that we don't think that they can be used in all circumstances. But often sanctions send particular messages to people that are not useful. Any regulator will tell you that the best kind of compliance is voluntary compliance, where people want to comply. People want to comply - and indeed, people comply for a whole lot of reasons, negative and positive. One is fear of punishment, but also they might do it because, (a) they think the law is virtuous in itself, (b) because they think the way it is being applied is fair, (c) because their government regulator makes it easier for them to comply by giving them information or training, or simplifying the task, and so on. So, there are a number of other reasons why people comply, besides the fear of punishment. 

JENNIFER MARTIN
You've said that managers, and indeed organisations, are not always driven solely by profit. Now, I take your point, but what happens when the culture of an organisation is profit-driven to the extreme, such as we saw in the 2001 collapse in Australia of the insurance firm HIH, which had losses calculated at between three and five billion, or the Enron disaster, which led to the largest corporate bankruptcy in the US? 

JOHN ALFORD 
Yes. That's why we don't say that sanctions are entirely problematic. We say that there's a place for them, but they're part of a palate of different coloured, if you like, ways of inducing compliance. You always need to have a reserve. There's some famous work being done by an Australian criminologist called John Braithwaite on responsive regulation. One of the things that he demonstrates is that the regulator can adopt a positive and helpful stance to those they are regulating, but behind them, they need to carry a big sanction. So, the talk softly and carry a big stick maxim actually has some currency demonstrated in research and practice.

JENNIFER MARTIN
You're listening to Up Close. I'm Jennifer Martin. We're talking with public sector management exports John Alford and Janine O'Flynn. Now, are you saying that just because regulatees may not have the ability, or the rules are just too inconvenient or complex or inaccessible in the regulatees' point of view, that they shouldn't comply or try too? And regulations are always inconvenient to the regulatee, but it doesn't mean that they don't have to comply.

JOHN ALFORD 
Yes. Well, one of the things to encourage greater compliance is for regulators to look at the rules they're enforcing, and ask the question, do we really need this for the social outcomes that are important? You know, we want safer factories or cleaner environments or whatever, and it may be that there are changes that can be made to those that also simplify the task for the people being regulated. If you simply seek to apply sanctions, it's a bit like - I can remember once spending time in Italy and buying something in a shop, and asking how much it cost. The person behind the counter said something very quickly in Italian, and I asked, what? We went backwards and forwards, and each time, the person behind the counter was speaking louder and louder, whereas what they needed to do was speak slower. And in a sense, just increasing penalties is like speaking louder and louder.

JENNIFER MARTIN
And Janine, you have an example of the Moscow mayor and the weather bureau. Could you tell us about that?

JANINE O'FLYNN
Sure. This is a terrific example of where we start to really see the problem of thinking in a world of carrots and sticks. There's a really interesting case where the Moscow mayor - in fact, he sets up his own weather bureau, because he doesn't like the service received by the national bureau, and he becomes outraged at the weather bureau in Moscow when it fails to predict the exact timing and severity of a mammoth snowstorm. It infuriates the mayor, because he suffers, of course, all the political consequences of a massive unpredicted storm. He goes out into the press making the argument that he's going to start fining the weather bureau when they get the forecasts wrong, or when they don't get them exactly right. Of course, the bureau head comes out very quickly afterwards saying he wants a bonus every time they get it right, which is more than 90 per cent of the time. I think this is a great case to show the fact that carrots and sticks just cannot work in that environment. The weather is, of course, unpredictable, to some extent - in this case, about 10 per cent or 5 per cent of the time. But do we really think that imposing fines, and sanctioning the weather bureau when they get predictions wrong, will make them get them right more often in the future? Do they have the capability to get 100 per cent accuracy? It is, for me, a great case. It's one that we open the chapter in the book looking at this issue of motivation, because it so starkly shows us that using carrots and sticks just can't work in many cases. 
JENNIFER MARTIN
It's just a wonderful example. So, if we look beyond this traditional paradigm, which is of course what we're doing here today, of this cost benefits, can we just pin down, what are the obstacles that government and private organisations face, because there are those challenges on both sides. John, if I could begin with you, and perhaps private organisations?

JOHN ALFORD 
In terms of regulatees? 

JENNIFER MARTIN
Yes.

JOHN ALFORD 
Yes. Well, they mainly face the complexity of rules, but also the failure of the rules to take account of what's realistically possible, just as the weather bureau case shows. Really tackling some of these problems requires not so much the hardnosed carrots and sticks contracting as a different kind of relationship - a collaborative or partnership kind of relationship - and that calls for greater mutual commitment and trust between the organisations. Now, that’s all very nice to say. There's a lot of flim-flam talked about trust, but it's a very difficult thing to achieve in this kind of circumstance - not least because government organisations have a number of inherently governmental structures and processes, like accountability, rules, or the fact that policies change rapidly in politics.You know, a week is a long time in politics, and all of these factors then mean that it's hard for people acting on behalf of government to do collaborative things that build trust, because the accountability rules limit how much they can make positive gestures to the other party. The turbulence means they often have to reneg on undertakings they've made before. Complexity of government means it's hard to know who's responsible for what, and so on. So, all of these are obstacles for building the kind of relationship which would probably be a better way to handle these more complex situations. 

JENNIFER MARTIN
And Janine, if I could get you to talk to the government side of things? 

JANINE O'FLYNN
I think, in one way, it's very easy for us to look and say, these are the problems of private organisations or non-profits or regulatees that can't be managed well. But government organisations themselves come with, I think, four big problems that we cover in the book. John mentioned issues around accountability. We really have very complex and quite different accountability structures within government. They are to protect individuals, ensure due process, and we tend to build very complicated accountability structures; what many people refer to, of course, as the dreaded red tape. And that limits the way that government can engage with external parties. I think a really nice example of this is the perception of cosy relationships between public and private organisations, when you try to have more collaborative relationships. There's a sense that we have to be very separate, that this is about ensuring probity in government. We don't want to get too close to an external provider, but of course, that disrupts our chance to even have a very close relationship where we share information, and where we mutually adjust what we do so that we can get better outcomes. The second is one John mentioned as well, around complexity and inter-dependency. Much of the work of what government does really just is very complicated, and it's independent. It cuts across different government organisations, different jurisdictions of government, and we ask other parties to work with us in trying to do that. Our programs overlap, our goals don't match up, and we have a different monitoring and measuring sort of environment. John mentioned as well, turbulence. You know, a week in politics is a long time. Our strategies change, budgets get cut with no notice, or we have abrupt changes in the political environment. And striking up a relationship with external parties can be very challenging in that environment. I was speaking, actually, to a student in one of my classes yesterday who works in the non-profit sector, and this is an issue that emerges for non-profits all around the world, not just in the Australian context - it's, how do they ever become sustainable in a turbulent political environment where government's view of non-profit providers changes -- whether the governments are the left or the right, and where the budgets and resources can't be fixed sometimes for longer than about a year. Finally, there's just cultural differences. We tend, in government, to hire and train specialists, and we get them into our organisations because of their technical know-how, and then at some stage, we ask them to manage very complex relationships with external parties. Most of the time, we never train them to do that, and you can see that, over time, these four big issues can really shape the ability of government to be a good partner in any type of relationship. 

JENNIFER MARTIN
What happens if we get to the stage where we've decimated the public sector of these skills and this knowledge, and then say that the public sector no longer has those skills and knowledge, and then use that as an excuse to bring in highly paid contractors and outsourcing? 

JOHN ALFORD 
Yes. What happens is, the government ends up spending more money than what it was hoping to save, simply put. This is partly because they haven't really calculated some of the issues that we've been talking about. They don't look at those other types of costs and benefits that we've been referring to. 

JENNIFER MARTIN
With great damage to the central structure. 

JOHN ALFORD 
Yes. One expression that's used is the hollowing out of the state. There's a sort of big hole in the middle. It's like you've got what looks like a functioning human being, but if you look inside their head, there's just an empty space. That means that their capacity to do things is limited, and indeed, their capacity to get things back, to be able to take them up again, is limited. That, by the way, hasn't prevented some governments to doing that. A survey in England not so long ago showed that six out of 10 local councils were looking to in-source, to bring back in-house some functions that had previously been outsourced, you know, and they were doing that in order to save costs under the regime that was being imposed by the government of the time. 

JENNIFER MARTIN
This brings me to the question, which I'd like both of you to answer. What do you see as the long lasting impact of externalisation, Janine, if we go to you first?

JANINE O'FLYNN
Well, I think we can look at this as a mixture of positive and negative sorts of outcomes. First of all, I'd just like to say that this tends to be a very dynamic process, rather than a one-off decision. It's very rare that we externalise something, and then don't look at bringing it back in, or doing it in a different way over time. We can see that John's example just then of what's happening in the UK through 2011, 2012, under extreme budgetary pressures - we see this tendency for local councils to bring their services back in, so that they can very closely manage them on a costs basis. That goes against all of what we heard for the last 20 or 30 years on why they should go out. So, part of this is the dynamic process over time, and we can see, in that sense, thinking about what some of the positives and negatives of that are. If you can work with external parties that have the skills, the expertise, the particular capabilities that government needs to get it done, using the right type of relationship, I think the payoffs are spectacularly good. And we can see this in a whole range of areas around the world where governments work with other parties to pursue public value, and to deliver on big outcomes for their communities. And when we get it wrong, I think we see it go spectacularly bad. Governments lose, as John said, the capability to manage well. They lose control over particular types of public services. We open these up for the gaming behaviour of other actors, and we see all sorts of scandals, from military contracting in Afghanistan and Iraq through to problems with aged care delivery in the Australian context. These all have very big political effects for governments, and they have negative effects for individual clients and their communities. I think one of the things to really think about is how we can match up and be much more pragmatic, rather than ideological, about the types of relationship form that we use to try and deliver public services. So, I think there's a positive and a negative story in that. It's not one or the other.

JENNIFER MARTIN
And John?

JOHN ALFORD 
If I can take Janine's analogy further, what we'll probably end up with is a [unclear] - you know, good in parts and bad in parts. A way of explaining that is to go back to your earlier citation of the conservative activist in the US wanting to drown government in the bathtub. This is a classic case of one best way thinking, and what we've found is that, traditionally, ways of thinking about externalisation, as we call it, have been that either - on the conservative side - everything that's not nailed down should be contracted out, government is guilty until proven innocent. On the other side of politics, on the left side, everything that the government is currently doing, it should continue to do. We say, instead of either almost always or hardly ever, a better answer to this question is, it all depends; it all depends on the circumstances, and that's the central message of our book. What we say is that in some circumstances, it makes sense to do this. In circumstances where it's feasible to specify and monitor, where there's competition, where a good relationship can be established. But in other circumstances, it's a lot harder. So, it's probably okay to contract out garbage services. It's a little more complicated to contract out psychiatric services. 

JENNIFER MARTIN
Now, John, I'd like to finish with actually laying out your blueprint. If you could talk us through just how does a public service organisation decide to outsource or stay in-house, using your flowchart, your decision process that you have? 

JOHN ALFORD 
Basically, we think this is a matter of taking a number of decisions somewhat in sequence, although we're not advocating a lock-step rigidity to this. It's like a decision tree, where you start with asking a question, and then the alternatives then get you to ask a different question, and so on. So, the first question is, is there a compelling strategic reason not to externalise this activity? We think that that's the threshold question, because it's not a matter of degree, it's a matter of absolute either/or, really. If you decide that it doesn't make sense, then the next question is, is there anyone out there who does this kind of work, and that means checking out the market and seeing who does this kind of stuff. The third question, if the answer to that one is yes, is, how good a service is there compared to the costs? So, the classic value for money issue; can they provide value for money? And you can discover that through a tendering process, or through other kinds of analyses. Then, the next question, if you decide they can provide value for money, is, do the relationship costs outweigh all the previous benefits? So, we talk about the costs of specifying and monitoring and setting up competition, and all of those sort of things. None of these are reasons not to externalise, but they are things that have to be weighed up against the potential benefits, so it will all depend in that circumstance. So, if the answers to all of those four questions are, yes, then it makes sense to externalise. But if the answer to all of them are no, then obviously, that should be kept in-house. If the answers are mixed, which is the typical situation and more interesting, then usually you need to consider some hybrid arrangement or some variant of a partnership where you are trying to get the parties to work together. That may be easier said than done, but it usually ends up being a better thing to take the time and effort to do than doing the wrong thing in either of the other two directions. 

JENNIFER MARTIN
John, Janine, thank you so much for joining us today. 

JOHN ALFORD 
Thank you. 

JANINE O'FLYNN
Thanks for having me. 

JENNIFER MARTIN
We've been speaking with John Alford, Professor of Public Sector Management in the Melbourne Business School at the University of Melbourne. He was joined via Skype from Canberra by Janine O'Flynn, associate professor in the Crawford School of Public Policy at the Australian National University. Together, they have written a book, Rethinking Public Service Delivery: Managing with External Providers. Relevant links, a full transcript and more info on this episode can be found at our website at www.upclose.unimelb.edu.au. Up Close is a production of the University of Melbourne, Australia. This episode was recorded on Tuesday August 28 2012, and our producers were Kelvin Param and Eric van Bemmel. Audio engineering by Gavin Nebauer, additional research by Lydia Massang. Up Close is created by Eric van Bemmel and Kelvin Param. I'm Jennifer Martin, and until next time, goodbye. 

VOICEOVER
You've been listening to Up Close. We're also on Twitter and Facebook. For more info, visit www.upclose.unimelb.edu.au, copyright 2012 the University of Melbourne. 


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