Complex products and comprehensive service agreements: A case study of outsourcing in contract cities
| Date | 01 March 2015 |
| Published date | 01 March 2015 |
| DOI | https://doi.org/10.1108/JOPP-15-02-2015-B002 |
| Pages | 150-176 |
| Author | Spencer T. Brien,Leslie L. Hine |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 15, ISSUE 2, 150-176 SUMMER 2015
COMPLEX PRODUCTS AND COMPREHENSIVE SERVICE AGREEMENTS:
A CASE STUDY OF OUTSOURCING IN CONTRACT CITIES
Spencer T. Brien and Leslie L. Hine*
ABSTRACT. This study investigates how outsourcing multiple public functions
in a single contract increases the complexity of the services rendered under
the agreement. We hypothesize that product complexity arises in these
bundled service agreements due to several factors including diseconomies
of scope, the “lock-in” problem, and communications problems between the
contractor, the government and the public. We investig ate these questions
using a textual analysis research methodol ogy to examine the initial contract
documents that formalized a n agreement between the City of Sandy Springs
Georgia and the firm CH2M Hill. The results of this qualitative study
identified several ways that different combinations of func tions increased
product complexity. It also revealed ways t he contracts were designed to
mitigate the risks of outsourcing multiple functions in a single contract.
INTRODUCTION
This study examines the impact of outsourcing multiple services
in a single contract agreement. We investigate whether the
combination of multiple functions increases the complexity of the
outsourced activities. Complexity is defined as uncertainty with
respect to the cost, quality and quantity of the products to be
delivered under the contract (Bajari & Tadelis, 2001). Product
complexity is a problem for contract administration because it makes
it difficult to establish the terms of a service agreement and it can
provide incentives for both parties to the agreement to act self -
interestedly at the other party’s expense (Brown et al., 2009). This
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* Spencer T. Brien, Ph.D., and Leslie Hi ne, MSW, are an Assistant Professor,
and a Doctoral Student, School of Public Affairs, Arizona State University. Dr.
Brien’s research focuse s on the financing of local government services. Ms.
Hine’s research interests include implications of relational contracting
approaches for public management.
Copyright © 2015 by PrAcademics Press
COMPLEX PRODUCTS AND COMPREHENSIVE SERVICE AGREEMENTS: A CASE STUDY 151
self-interested behavior creates risks that threaten the public good.
Our research objective is to identify how combining multiple functions
in a single contract can increase product complexity and determine
how contract elements impact the risks associated with this form of
product complexity.
Developing an understanding of bundled service agreements is
important to the study of public procurement because it is an
increasingly common approach to outsourcing. Firms offering a set of
services can offer economies of scale, meaning a reduction in
average costs as the level of service delivery increases. At the
extreme, several cities have adopted a “contract city” model of
governance in which all public functions are outsourced to one or two
private partners and only and handful of public employees remain on
the city staff. Although these contract cities have received some
attention in the literature (see Bradbury & Waechter, 2009; Ni,
2010), there remain many unanswered questions about what risks
this new model of government poses to the public and whether public
officials are designing contracts that can adequately mitigate those
risks. Local governments that outsource to a lesser extent should
also be aware of any risks associated with bundled service
agreements.
We develop a principal-agent framework to analyze the
interaction between the public good and the risks associated with
product complexity. Within this framework, the principals are the
governments interested in outsourcing services and the agents are
the firms hired to deliver those services. Before an agreement is
signed, both parties negotiate the terms of a contract in order to
mitigate risk and protect the public good. The agent is also assumed
to pursue terms that allow it to maximize its long-term profits. The
public good is conceptualized according to Cooper’s (2003) model of
public outsourcing. The risks of outsourcing through bundled
services contracts are identified in the contracting literature. Most
prominent are the “lock-in risk” and the concept of “diseconomies of
scope” (Bajari & Tadelis, 1999; Brown, Potoski & Van Slyke, 2009;
Rawley & Simcoe, 2010). Also, we argue that some risks associated
with single service contracts, such as those associated with the
termination of a contract or with the distance between the service
consumers and government officials, can be heightened in a bundled
service context.
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