Cost Accounting in Local Government

To Outsource or not to Outsource

In these days of budget angst and woe you may be getting pressure from your elected officials or community to outsource services that are currently provided by City staff.  But will this actually save the City money while providing the same level of service to the community?

To determine whether that is the case you must look at not only the direct cost of providing the service, but any ancillary costs that go along with that service.  Let’s use as an example outsourcing tree trimming services.

Direct Costs

It could be relatively simple to determine the direct cost of providing tree trimming services in your City, if there discrete individuals who only do tree trimming.  But if you have staff that does tree trimming and other services, such as park mowing, then it gets more complicated.  You need to determine what each employee does and how much time they spend doing it?  Then you need to look at your employee mix if tree trimming were no longer provided by City staff.  How many employees and supervisors are needed to provide the remaining services?  If there are minimal layoffs, chances are the cost savings will be less than hoped for because you will likely be laying off newer and cheaper employees.

Indirect Costs

While you should look at the full costs of providing a service when comparing that service with a private contractor, including overhead costs, it is important to understand what costs the City will be saving and what costs will just be reallocated to other services.  For instance, part of the overhead cost is a portion of the City Manager cost.  Obviously, even after contracting out tree trimming services, there will still be a need for a City Manager.  These costs will just be reallocated to other services, and there is no cost savings to the City.  But if contracting out tree trimming services means there will be less vehicle maintenance costs, then there will be a cost savings to the City.  So now the same questions that were asked of the park maintenance staff above will need to be asked of the vehicle maintenance staff and everyone else who provides administrative support to parks maintenance: How would you job responsibilities change based on tree trimming being contracted out.  Only then can you determine what are the fixed costs and what are the marginal costs.

Contract Administration and Conversion Costs

Finally, it needs to be determined what costs would be added to City staff if tree trimming is outsourced.  There is now a new contract that needs to be administered and supervised, and there should be performance measures in the contract that would need to be spot-checked.  Who would do contract administration and how will that affect the other services currently provided by that person?

Are there one-time conversion costs, such as pay outs to laid-off employees or costs associated with transferring maintenance vehicles to the contractor?  Are those costs going to be front-loaded in the first year or amortized over the length of the contract?

Also, are there any off-setting revenues that would accrue to the City by contracting out, or would the City lose any revenues by contracting out.

This overview shows that deciding whether to outsource a service is not a simple process.  More importantly, it reinforces the idea that decisions of this type cannot made in a vacuum.  Good decisions come from good information.  You will need information about what services are being provided to the public, what services are being provided to other departments, and who is providing those services.  Without this information you can’t know whether outsourcing a service is economical or not.

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