Assessing the management costs of delivering services under alternative institutional arrangements
| Date | 01 March 2004 |
| DOI | https://doi.org/10.1108/JOPP-04-03-2004-B003 |
| Published date | 01 March 2004 |
| Pages | 375-396 |
| Author | Trevor L. Brown,Matthew Potoski |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 4, ISSUE 3, 375-396 2004
ASSESSING THE MANAGEMENT COSTS OF DELIVERING
SERVICES UNDER ALTERNATIVE INSTITUTIONAL
ARRANGEMENTS
Trevor L. Brown and Matthew Potoski*
ABSTRACT. In this paper we assess the management costs of delivering
services under alternative institutional arrangements. We develop an analytic
framework based on transaction cost and public sector network theories to
identify management costs public managers face in delivering services directly
and via contract. Results from a survey of refuse collection managers in Ohio
indicate that direct service provision carries higher management costs, though
when combined with vendors’ activities, contracting carries more monitoring
costs. These results suggest two important contributions to knowledge and
contract management practice. First, we develop an innovative approach to
assessing management costs. Second, we use our framework to determine
whether there are differences in management costs under alternative institutional
arrangements that managers should take into account as they approach the
“make or buy” decision.
INTRODUCTION
A fundamental decision confronts all governments – should a good
or service be produced internally or purchased externally via contract?
In the public sector, intense pressures to reduce costs have fueled an
increase in the use of contracting (Greene, 1996). Some public sector
procurement regulations even mandate that governments select the
lowest cost bid, although more recent regulations allow consideration of
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* Trevor L. Brown, Ph.D., is an Assistant Professor, School of Public Policy
and Management, Ohio State University. His teaching and research interests
are in public management, organizational theory, and service delivery.
Matthew Potoski, Ph.D., is an Assistant Professor, Department of Political
Science, Iowa State University. His teaching and research interests are in
public policy, organizations, and service delivery.
Copyright © 2004 by PrAcademics Press
376 BROWN & POTOSKI
other factors, such as vendors’ past contract performance (Kelman,
2002). In this paper, we make the case that procurement decisions
should be based not only on price and past performance, but must
include systematic analysis of the management costs of producing
services internally and via contract.
We draw on transaction cost and public sector network research to
develop a simple framework for assessing the relative management costs
of delivering services under alternative institutional arrangements. Our
framework identifies the types of costs public managers face in
delivering services directly and via contract. Transaction cost theory
points to the importance of monitoring service delivery, while network
theory highlights managing external relations with those outside the
government. We then draw on a survey of municipal refuse collection
managers in the state of Ohio to develop metrics for assessing the
relative management costs under alternative institutional arrangements.
About half of the sample of Ohio communities delivers household refuse
collection via contract, while the other half delivers it directly. Because
we also surveyed vendors who service contracting governments, we
combine the results from governments that contract for refuse collection
with the vendors that provide the service to assess the full management
costs for some aspects of contract service provision.
Results from the survey indicate that direct service provision carries
higher management costs, though when combined with vendors’
management activities, contracting carries more monitoring costs. This
pattern may hold for other management activities beyond monitoring,
suggesting that future research evaluating contract management should
take into the account the activities of both contracting governments and
the vendors that execute the service. Our inquiry yields two important
contributions to procurement knowledge and practice. First, we offer an
innovative approach to assessing the management costs of delivering
services under alternative institutional arrangements. Second, we use our
framework to determine whether there are differences in management
costs under alternative institutional arrangements that managers should
take into account as they approach the “make or buy” decision.
IDENTIFYING MANAGEMENT COSTS
As a host of research has shown, governments’ ‘make or buy’
decisions are based on a variety of factors, including costs, the salience
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