The Efficiency of Public Sector Outsourcing Contracts: A Literature Review

Abstract

Outsourcing the provision of traditionally publicly-provided services has become commonplace in most industrialized nations. Despite its prevalence, there still is no consensus in the academic literature on the magnitude (and determinants) of expected cost savings to the government, nor the sources of those savings. After articulating the differences between outsourcing and privatization, this article considers the arguments for (and against) outsourcing and then examines the empirical evidence pertaining to whether any observed savings occur and whether they persist over time. In addition, we examine the existing evidence for the "redistribution hypothesis" and the "quality-shading hypothesis", which critics have used to argue that outsourcing may result in lower government expenditure, but it does so by lowering wages and conditions for employees and lower quality services. Finally, we consider the impact of contract design on outsourcing outcomes. While the nature of the risk-incentive trade-off is well-known in the contract theory literature, some new empirical work has explored the application of this framework to outsourcing in order to understand the impact of the risk premium on outsourcing outcomes.

The Impact of Corruption on Economic Growth in OIC Countries

“…However, Government expenditure reduces economic growth by generating higher levels of taxes, and thus decreases the share of private sector. In more general terms, the use of government resources is altered to the public sector from the private sector, and most economists argue that the private sector is more efficient allocation of resources than the public sector (e.g., Jensen & Stonecash, 2004;Cooray, 2009;Nurudeen & Usman, 2010).…”

A managerial application of system dynamics modeling to outsourcing

“…Ultimately leading to a degree of loss of control as advocated in the earlier literature (Barthélemy, 2003;Yakhlef, 2009) which argued that outsourcing often transform organizations from "performers" to service purchaser in relation to the outsourced activities. It is worth noting that this purchaser status sometimes come with a price tag which is in form of compensatory expenses on control of the process which could feedback to cancel out whatever cost might have been saved through outsourcing, if any ( Jensen and Stonecash, 2004).…”

“…However, there was no consensus in the literature on the much touted cost saving feature of public sector outsourcing, nor the sources of the saving (Jensen and Stonecash, 2004 System dynamics modeling to outsourcing 5.2 The dynamic behavior of (public sector) outsourcing The model showed that, outsourcing consists of a number of prominent reinforcing loops (see Figures 2 and 10). The implication of this is that any trend driven by these loops, be it positive or negative, and has the propensity to perpetuate itself.…”

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“…Both outsourcing and privatization of traditionally publicly provided services (Jensen and Stonecash, 2004) have been seen as a solution to the growing gap between available resources and pressing needs (Rissanen, Hujala, and Helisten, 2010). New forms of enterprises as well as public-private-partnerships are looked upon with heightened interest, and a better and more creative interplay between public and private actors is hoped for (Forrer et al, 2010;Neck, Brush, and Allen, 2009;McGahan, Zelner, and Barney, 2013) to solve challenges related to, among others, the environment, global economic turmoil and instability, heavily aging populations and other rapid changes.…”