government outsourcing (with a focus on Indiana's welfare program)

Stephen Goldsmith (former mayor of Indy, privatization guru, and professor at Harvard's Kennedy School of Government) in The American on "outsourcing" by government...

It is difficult to get Democrats and Republicans to agree about much of any­thing these days, but politicians of every stripe are likely to concur on this proposi­tion: government at all levels has promised much more than it can deliver, and every year the gap grows worse. One potential solution to this intractable problem is the outsourcing of govern­ment functions to the private sector, but it appears almost certain that any significant steps toward privatization are going to occur at the state level. Why? Because that’s where the most exciting work is going on right now, and because Washington appears allergic to public-private innovation. Congress not only clings to the view that gov­ernment workers must produce all government services, but also even tries to impede progress when it surfaces outside the Beltway—witness the provision tucked inside the 2007 farm bill that would prohibit outsourcing by states and require government employees to process all applications for food stamps....

Functions such as law enforcement and public safety are typically considered inherently govern­mental. But as the mayor of Indianapolis for two terms (1992–1999), I outsourced the operation not only of a jail but also of an airport and a utility—with good results. It was hard not to be amused, as the GAO panel debated the definition of an inher­ently governmental function, by the fact that the federal building we were meeting in was under the protection of a private security firm. Even if we could agree on core government functions that had to be walled off from contractors, we would be left with a thorny question: what happens when government turns out not to be very good at inher­ently governmental work?

At the state level, several governors and legis­latures are not getting hung up on philosophical questions and are instead rushing to try private-sec­tor solutions to pernicious public-service problems. Officials do so at significant political risk, but the potential for success—and for breaking with age-old failures—seem worth the gamble.

In 2004, Mayor Richard Daley secured a $1.8 billion deal to lease the operation of the 7.8-mile elevated toll road known as the Chicago Skyway to a private consortium for 99 years. Two years later, Indiana made a deal with the same consortium: a 75-year lease for $3.8 billion to operate the Indiana Toll Road. Other states have outsourced the operation of toll roads and bridges, and more are consider­ing it. Privatizing state lotteries is also under discussion.

But leasing out toll roads and lotteries is relatively simple; some states are showing much bigger ambitions. Texas has attempted to outsource the way that welfare eligibility is determined, for instance, and Florida has privatized its human-resources operations. Neither venture has found much success, but they offer lessons that might help officials elsewhere as they attempt their own innovations. Certainly, the efforts in Texas and Florida are an indication of how today’s public-private partnerships differ significantly from those of recent decades. No longer limited to ownership of a public asset, privatization initia­tives nowadays are increasingly adventurous. Businesses and government are clearly ready to consider tackling complex policy problems using modern technology and the creative spark of pri­vate enterprise.

Perhaps no state or local effort in the last several years better represents the future of privatization than the welfare-eligibil­ity modernization project launched last year in Indiana. The complex undertaking points to the substantial potential and pitfalls of government outsourcing.

Goldsmith then goes into great (historical) detail on the potential privatization of welfare in Indiana-- before turning to analysis of key considerations for going forward...

...Despite all these reasons to look to the private sector, Roob and Main had to consider three fac­tors that favored an internal transformation. None was related to the inherently governmental nature of the FSSA’s services.

First, no state had ever successfully outsourced its eligibility-determination system for all major benefits programs. Florida and Texas were the only states that had attempted anything similar, and, at the time, their prospects didn’t look good....

Second, an approach toward internal trans­formation would avoid the inevitable political considerations typically involved in a major priva­tization initiative. Governor Daniels was facing opposition to the privatization of the Indiana Toll Road, and there was a chance that similar oppo­sition from state elected officials, interest groups, or the general public might create obstacles to the transformation of the FSSA.

Third, the KPMG audit identified the FSSA’s severe lack of contract-monitoring capac­ity as a major risk factor. Despite holding more than 10,000 contracts with service provid­ers, the FSSA made few efforts to ensure vendor accountability. A contract of the size, scope, and complexity being contemplated would expose the FSSA to even greater liabilities, from abuse to poor performance.

As Indiana’s decision-making process illustrates, the line between public and private is permeable. A state could use some combination of private and public elements, such as management, employees, and technology. However, the critical question is less about which sector to employ than about the avail­ability of the requisite skills and technologies....

Having weighed the FSSA’s available capac­ity and resources, Roob and Main decided to take the work outside. Indiana awarded a $1 bil­lion-plus, seven-year contract—with an option to extend to ten years—to a group of private and nonprofit agents led by IBM and its subcontrac­tor ACS. Indiana charged the IBM coalition not only with taking over the client-intake and wel­fare-to-work functions that state caseworkers had been performing, but also with finding solutions to major problems within the state’s social service sys­tem: inefficient and outdated business processes, out-of-control Medicaid expenses, poor customer service, and one of the nation’s worst records for implementing federal welfare reforms. Any one of these challenges would be a major test for an agency or contractor; taken together, they pre­sented a monumental task.

Indiana imposed one critical condition on its hir­ing of outside help: the vendor would be required initially to hire all caseworkers not retained by the state. This stipulation proved to be an impor­tant difference between the approach in Indiana and the failed privatization in Texas, where new hires were undertrained and underinformed....

Indiana expects that the modernization will radically improve its ability to reduce mistaken benefit expenditures for ineligible applicants. The resulting savings—plus the fact that the vendor will be responsible for errors in eligibility determina­tions—mean that the true reduction in costs will be considerably higher. Governor Daniels estimates total savings will equal $1 billion over ten years.

Now, for Goldsmith's conclusion and application to other efforts...

While it is too early to determine whether Indiana’s daring plan will succeed in bringing about such substantial cost reductions, saving taxpayers’ dollars cannot be regarded as the sole criterion of success. It will be just as essential for the pro­gram to show that a true, effective transformation of government services has been accomplished—an achievement that will provide a blueprint for other public officials as they try to meet escalating demands on resources.

Three emerging developments explain why now, more than at any other time, we are on the verge of a true transformation of the public sector: digital platforms consolidate important data sources and make them more accessible; private-sector part­ners, with their experience as network integrators, are more adept than a patchwork of state agencies at meeting the multiple needs of individual clients; and decision-support systems employ algorithms to analyze large amounts of data, helping public employees identify problems and structure indi­vidualized solutions.

The state will have only one hand to shake if things go well, or, if the modernization goes sour, one neck to wring....

Indiana’s progress represents an important early step in what may well become a dramatic revision of the way we think about public-sec­tor services. Public-private collaboration in the 21st century will not only provide solutions to complex public-sector problems, but it will also harness the power of data and information to unlock value hidden even deeper inside govern­ment programs.