Evaluation of Transportation
Organization Outsourcing: Decision Making Criteria for Outsourcing
Opportunities
Project 01 – 03
October 2002
Department of Civil and Environmental
Engineering
University of
Authors:
Robert J. Eger III, Deborah A. Knudson, Justin Marlowe, Libby Ogard;
Department of Political Science,
The Tioga Group
Principal
Investigator: Dr. Robert J. Eger III;
Assistant Professor, Department of Political
Science,
DISCLAIMER
This research was funded by the
The United States Government assumes no liability for its contents or use thereof. This report does not constitute a standard, specification, or regulation.
The United States Government does not endorse products or manufacturers. Trade and manufacturers’ names appear in this report only because they are considered essential to the object of the document.
EXHIBIT
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Technical
Report Documentation Page
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1. Report No. |
2. Government Accession No. |
3. Recipient’s
Catalog No. CFDA 20.701 |
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4.
Title and
Subtitle Evaluation of
Transportation Organization Outsourcing: Decision Making Criteria
for Outsourcing Opportunities |
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Report Date |
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6. Performing
Organization Code |
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7.
Author/s Robert J.
Eger III, Deborah A. Knudson, Justin Marlowe, Libby Ogard |
8. Performing
Organization Report No. MRUTC 01-03 (2002) |
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9. Performing
Organization Name and Address University of
Wisconsin-Milwaukee
Department of Political Science |
10. Work Unit
No. (TRAIS) |
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11. Contract
or Grant No. DTRS 99-G-0005 |
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12. Sponsoring Organization Name and Address Research and Special Programs Administration |
13. Type of
Report and Period Covered Final Report [July 2001-October 2002] |
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14. Sponsoring Agency Code |
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15.
Supplementary Notes Project completed for the |
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16. Abstract This
study has primarily two objectives. First, using a series of case
studies and survey research, it provides a comprehensive overview of
transportation outsourcing practices in a variety of public and private
sector organizations. The results of these case studies show that
public sector organizations, particularly state departments of
transportation, identify many of the same costs, benefits, challenges, and
risks associated with outsourcing as their private sector counterparts.
In light of these findings, this study then translates the private sector’s
extensive outsourcing experience into a “scorecard” designed to serve as a
decision making tool for administrators to identify services that have the
potential for successful outsourcing.
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17. Key Words Outsourcing, Asset
Management, Decision Making, Resource Allocation, Contracting, Business
Practices |
18.
Distribution Statement No restrictions. This report is available through the
Transportation Research Information Services of the National Transportation
Library. |
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19. Security
Classification (of this report) Unclassified |
20. Security
Classification (of this page) Unclassified |
21. No. Of Pages 87 |
22. Price -0- |
Form DOT F 1700.7 (8-72) Reproduction of form and completed page is authorized.
TABLE OF CONTENTS
n Study Design and Organization
n The Transition To Outsourcing
n Private Sector Manufacturer Survey
n Third Party Service Provider Survey
n State Department of Transportation Survey
n Third Party Service Providers
n State Departments of Transportation
n Establishment of Goals and Objectives
n Information and Analysis Systems
n Development of Plans and Programs
Recommendations and
Conclusions
EXECUTIVE SUMMARY
n
Project Summary
This study has primarily two objectives. First, using a series of case studies and
survey research, it provides a comprehensive overview of transportation
outsourcing practices in a variety of public and private sector organizations.
The results of these case studies show that public sector organizations,
particularly state departments of transportation, identify many of the same
costs, benefits, challenges, and risks associated with outsourcing as their
private sector counterparts. In light of
these findings, this study then translates the private sector’s extensive outsourcing
experience into a “scorecard” designed to serve as a decision making tool for
administrators to identify services that have the potential for successful
outsourcing.
n
Background
Why Outsource?
Successful outsourcing has been demonstrated to provide
organizations with a number of benefits, most of which result from improved
efficiency. Through the emphasis of
“essential” or “core” functions, an organization is able to streamline its
operations by maintaining only those resources considered essential to its
mission or business model. Undoubtedly,
intra-organizational or “non-core” functions such as information technology,
equipment maintenance, custodial services, and others are critical to effective
and consistent operations. But to date,
the private sector experience has shown that specialized third party
contractors are typically able to deliver such services with comparable or
better quality, and often at lower costs, than in-house providers. Because of the streamlining it facilitates,
effective outsourcing also allows firms to expand their market share, pursue
new strategic directions, and improve overall competitive advantage. As a result, organizations in both the
private and public sector have several incentives to explore their outsourcing
options.
To date, public sector outsourcing has earned a
mixed record of success, failure, praise, and criticism. Although it began with small-scale, easily
monitored services such as trash and leaf collection, governments have recently
attempted to outsource more stylized services such as mental health care, job
training, Medicare and Medicaid, and the focus of this study, transportation
logistics. As the breadth, and
complexity of government outsourcing has expanded to include these sorts of
services, so too have the challenges public managers face in maintaining
effective and efficient service delivery.
In some cases, those challenges have been tremendous, and have led to
what many consider to be substandard levels of service quality. In others, outsourcing has provided
governments with tremendous costs savings and service quality improvement. These and other broad issues are described in
more detail in the Literature Review section of this report.
The current limited literature, as well as the
results of this study, shows that state departments of transportation have
neither succeeded nor failed in their efforts to outsource transportation
services. Rather, it is apparent that
institutional issues surrounding the outsourcing decision process and concerns
relating to the outsourcing results influence the implementation of widespread
outsourcing.
Despite their unique characteristics, the study
results show that departments of transportation and private sector
manufacturers have very similar transportation outsourcing needs. Both maintain large information networks,
growing vendor bases, complex equipment inventories, unique fleet maintenance
needs, intricate workflows, intensive information reporting, shrinking work
forces, and many other similar demands that require effective and efficient
service provision. Therefore, this
study offers a number of lessons learned from the private sector to assist
departments of transportation with regard to these key challenges.
The Importance of Core Competency Assessment
Assessing government core competency is often an
ambiguous process. The scope of
government services, as well as the complex interactions among agencies at all
three levels of government, makes it challenging to identify an articulated government
strategy, competency, or mission. Some
might argue that government exists solely to provide unemployment benefits,
income assistance, national defense, interstate highways, and other services
that are too complex or costly to be provided by the private sector. As a result, assessing governments’
“non-core” functions is a demanding task.
At the same time, many of the manufacturing firms
interviewed for this study manage that same ambiguity and complexity when
identifying their own core competencies.
Like governments, many manufacturers have developed tremendously complex
infrastructure networks, subsidiary firms, and auxiliary services necessary to
provide consistent services to suppliers and customers. When faced with the prospect of outsourcing,
firms managing this complexity must grapple with many of the same challenges in
assessing core competencies as their government counterparts.
The Importance of Managing the Outsourcing
Relationship
Given their inherent emphasis on accountability and
oversight, governments appear to have gravitated toward a “performance
contract” approach rather than the “outsourcing relationship management”
approach that is known to be private sector best practice. Unlike the private sector, where diminished
service quality may impact investor profits, diminished quality of garbage
collection, road maintenance, job training, or other commonly outsourced public
services may significantly impact overall quality of life. For this reason, public sector agencies have
promulgated well-defined service outputs, quality indicators, oversight boards,
and other features designed to ensure that “the public gets what it pays for”
when outsourcing occurs. In some cases,
oversight itself has been outsourced, as many governments have hired
professional oversight firms to monitor other outsourcing contracts. This emphasis on contract or
“principal-agent” type relationships has in most cases produced its desired
predictability, stability, and accountability.
However, the need for oversight and the costs that accompany it have
often negated the costs savings generated by outsourcing.
The manufacturing firms and third party service
providers interviewed for this study describe a very different approach to
outsourcing management. That is, rather
than viewing outsourcing arrangements as strict, output-driven,
oversight-laden, quid pro quo contract arrangements, the private sector firms
describe their outsourcing arrangements as dynamic, fluid, negotiated, mutually
dependent, and continuous relationships often supplemented by performance
incentives and flexible monitoring. The
results, according to the private sector, are mutually managed relationships
that are effective because they contain elements of trust and flexibility. These sorts of relationships, according to
the private sector, are critical to outsourcing success. The difficulty in moving the public sector
away from a performance contracting perspective and toward an outsourcing relationship
is obvious.
n
Process
As part of this study, interviews and surveys were
conducted to assess individual and organizational perspectives on key aspects
of the outsourcing process in manufacturing firms, third party service
providers, and state departments of transportation divisions. The manufacturers and third party service
providers were chosen first because of their reputations as effective
outsourcers, and also because of their similarities to state departments of
transportation divisions in terms of overall size and service demands. A total of five manufacturing firms and two
third party service providers took part in the study. The state departments of transportation were
all cold weather states with characteristics similar to the Region V states of
Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin. A total of 66 surveys were sent to State
Department of Transportation Secretaries/Commissioners, Deputy
Secretaries/Commissioners, Chief Highway Engineers, and Division Directors. The state departments of transportation surveyed
included: Connecticut, Illinois, Indiana, Iowa, Kansas, Maine, Massachusetts,
Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York,
North Dakota, Ohio, Pennsylvania, Rhode Island, South Dakota, Vermont,
Virginia, Wisconsin.
After some preliminary interviews and informal data
collection, separate survey questionnaires were developed for each of the three
groups. Although the questionnaires were
formatted roughly the same, containing multiple choice, required ranking
attributes, and open-ended question, each dealt with the unique outsourcing
issues within each of the three types of organizations. The manufacturer survey gathered information
about manufacturers’ outsourcing goals and objectives, information requirements
and collection issues during the outsourcing process, planning processes, and
program development and implementation of outsourcing programs. The third party
logistics provider survey explored the provider’s perspectives on outsourcing
issues and practices identified by manufacturers, as well as their perspectives
on doing business with government entities. The department of transportation
questionnaire contained questions focusing on organization size, scope, goals,
and information as well as outsourcing plans and programs. Specific information about these
organizations, as well as the actual questionnaires and responses, can be found
in the Template for Case Studies section and the Appendices, respectively.
n
Comparative Survey Findings
What services are commonly outsourced, and what
prevents broader public sector transportation outsourcing?
·
The most commonly outsourced services are information technology, asset
maintenance, material distribution, warehousing, and fleet management.
·
Since 13 of the transportation division respondents indicated no
participation in outsourcing, all transportation division respondents were
asked about the characteristics and processes that facilitated or impeded
outsourcing. According to them, the
primary barriers to outsourcing are labor agreements followed by government
regulations.
·
Since little is known about the results of assimilating private sector
objectives into those of the public sector, the responding groups were asked to
provide the top three risks to outsourcing.
Both public and private sector organizations often cited the potential
for diminished service quality as a risk.
However, the groups differed between the risks of cost and product
control. The risks associated with cost
containment are seen as one of the top three risks to outsourcing for 19 of the
28 transportation division respondents, while only 1 out of 5 manufacturers
noted this as an important risk.
How are outsourcing options evaluated?
·
Departments of transportation divisions generally do not use experts to
assist in the outsourcing decision.
·
With respect to benchmarking, little difference is found between the
public and private sectors. Among those
groups that utilize benchmarking, past outsourcing experiences are the most
commonly used benchmark. This indicates
that institutional history plays a critical role in the decision making
process.
·
Manufacturer, transportation division, and 3PL respondents are similar
in many respects when instituting the outsourcing decision. The groups are similar in current outsourcing
activities, barriers, and risks associated with outsourcing. In addition, the groups exhibit minimal
differences in using expert assistance and rely on institutional history to
guide their benchmarks.
·
Costs and determining service needs are common themes among the three
groups. In addition, transportation
division respondents distinctively focused on specific information such as
provider capacity and qualifications and the availability of in-house
expertise.
·
When the transportation division respondents were asked whether or not
access to information had improved as a result of outsourcing, about 57%
indicated that access had improved over time.
This improvement helped the decision to outsource and the analysis of
outsourcing’s impact. In addition, both
the manufacturer and 3PL respondents indicated that electronic collection and
analysis improved, and increased electronic integration has changed the
information and data collection processes.
Thus, the responses from all three groups were complementary.
How are outsourcing contracts negotiated and
monitored?
·
An essential aspect in the decision to outsource or to be a provider of
outsourcing is the development of the relationship between the outsourcer and
the provider. The factors that influence
the decision to outsource are important for providing the groundwork for
developing an outsourcing relationship and scorecard themes. The transportation division respondents were
different from the other two groups with respect to the factors influencing
provider selection only in choosing strategic direction as an important factor.[1]
·
Both the transportation division and manufacturing respondents rated
business qualifications of the provider as the most important factor
influencing the outsourcing decision. In
addition, cost was an important influencing factor for the transportation
division respondents. This finding
coincides with the transportation division respondents’ ranking cost
information high on the list of informational needs to begin outsourcing.
·
Other factors that influence the outsourcing decision are quality,
reputation, and operational excellence.
Manufacturing respondents ranked financial stability, operational
excellence, cost, and quality as equivocally the second most important factors
in selecting a provider. Although
operational excellence, cost, and quality rank similarly with transportation
division respondents, financial stability is not as highly ranked. Instead, state transportation respondents
weight reputation as one of the most important factors influencing provider
selection.
·
Other essential components for the outsourcing decision making process
include establishing policies and procedures and performance incentives. The transportation division respondents
overwhelmingly use existing policies and procedures, which provides another
clear indication of the value of the public institution’s history. Transportation division respondents cited
unique policy development only 15% of the time, while manufacturers and 3PLs
most often developed unique policies and procedures to meet the needs of the
particular outsourcing venture.
·
All manufacturing respondents offer providers gain sharing at least
sometimes, while monetary awards are offered by the transportation division
respondents 52% of the time. By
contrast, future contract preference or more business is offered less than 50%
of the time by state transportation respondents. These differences between the transportation
division respondents and the manufacturing respondents appear to be a function
of the institutional setting, including the limitations placed on state
transportation departments with respect to monetary rewards.
·
One key focus of outsourcing is the timing of performance
measures. Provider’s performance was
measured from as often as weekly to as stark as at the end of the project. The majority of state transportation
respondents identified weekly and monthly as the most common performance
measurement timing. This finding is
consistent with the manufacturing respondents; however, manufacturing
respondents identified a custom tailored approach to the timeliness of
performance measurement. This approach
includes continuous and daily assessment in addition to the weekly and monthly
assessments depending on what aspect of performance is being measured. Overall,
manufacturing respondents emphasize the necessity of continuous and consistent
performance measurement, especially when faced with exceptions to standard
company practice.
n
Policy Options/Scorecard
The observations included in this study provide for
the development of a decision making scorecard, which combines lessons learned
from previous work by AASHTO and TRB.
·
First and foremost, the decision to outsource must incorporate a change
in the treatment of the traditional performance contract relationship. This change must include the degree to which
the contractual relationship continuum flows.
Simply put, successful outsourcing appears to be predicated on a
relationship, not a contract.
·
Giving consideration to the private sector interviewees, the second
important aspect to successful outsourcing is the identification of the
organization’s core competencies. By
identifying core competencies, the organization can evaluate the non-core
services that are currently provided but have the potential for
outsourcing. Non-core services
constitute those which the organization feels are necessary to be provided on a
continual basis, but do not necessarily need to be provided by the organization
itself.
·
One aspect of this project is the importance of goals and
objectives. The outsourcing relationship
cannot begin without a set of measurable objective criteria. This includes a consideration of the question
of what the impact of non-achievement will be.
·
Evaluating the availability of third party service providers is a key
to the decision making process.
Capability and quality are critical aspects of this evaluation.
Given the information gathered in this project, the
following set of recommendations are proposed for state transportation
officials:
1. Pay particular attention to
the institutional setting in which the outsourcing is taking place. Will this decision negatively impact the
department of transportation by assigning a core competency to the private
sector? Incorporate these issues into
the decision making process.
2. The decision to outsource
incorporates a series of risks. These
need to be carefully assessed.
3. Measuring provider
performance can potentially be a point of contention for the outsourcing
relationship. Objective measures need to
be mutually established with opportunities for modification as the need arises.
4. Although quality was
identified as a concern and a friction point, the actual quality of services
were found to be equivalent or higher than the work performed by the state.
This finding indicates that departments of transportation should place less
emphasis on quality as a constraint to the outsourcing decision.
5. Relationship management is
critical for successful outsourcing.
Departments of transportation need to adopt a new perspective on
outsourcing, from one of performance contracting to one that considers
outsourcing as a long-term relationship.
6. The outsourcing decision cannot be rushed. Open mindedness, accuracy, and thoroughness are far more important to the outsourcing decision than swiftness.
Introduction
n
Study Purpose
Private industry has
extensive experience with outsourcing functions that fall outside of the firm’s
core competence. Outsourcing and privatization are national business trends
that are becoming increasingly relevant to public-sector managers. Several
jurisdictions in areas similar to the upper Midwest have successfully
established competitive outsource operations. A number of private sector
transportation companies have adeptly implemented outsourcing programs that may
act as models for public agencies.
Although the privatization
of publicly provided services continues to be a fiercely debated issue,
outsourcing challenges facing the public sector have similarities to private
sector challenges. Every state
Department of Transportation (DOT) has their own physical and geographic
constraints, unique organizational structure, diverse political environment,
and constituents needs. Subsequently, each has established goals, objectives,
standards, and priorities for managing their physical assets and processes.
However, DOT outsourcing needs have similar characteristics to those in the
private sector. These include, but are
not limited to:
Large information networks
Expanding vendor base
Complex inventory of
equipment
Maintenance functions
specific to unique fleets of equipment
Intricate workflows
Intensive Information
reporting
Shrinking work forces
Shorten turn around times
Smaller budgets
More customization
Unique customer demands
n Study
Design and Organization
The research design associated with this
project focuses on four principle efforts.
These efforts are as follows:
§
Provide a literature review relative to outsourcing decisions,
assessing core competencies, choosing an outsourcing provider, and examples of
best practices.
§
Develop a case study template that includes establishing criteria for
selecting case studies, developing protocols for obtaining information, and
documenting the outsource process and the supporting organizational structure.
§
Conduct interviews of private sector manufacturing companies, third
party service providers and state departments of transportation to assess
outsourcing activities from the perspective of each organization.
§
Compare the outsourcing perspectives of state departments of
transportation to private sector organizations, and establish recommendations
on potential areas for public sector outsourcing.
The following report provides a detailed
description of each step of the study.
Chapter two provides a review of the literature relevant to the study
and analysis of outsourcing. Chapter
three provides the template for case studies, which describes the survey
instrument for each of the three groups surveyed for this report. Chapter four provides case study descriptions
and detailed information on the survey responses of all manufacturing
companies, third party service providers and state departments of
transportation that responded to the survey.
Chapter five provides a comparison of the findings between each of the
three groups surveyed and derives a outsourcing decision making scorecard. Finally, chapter six provides conclusions and
recommendations for state departments of transportation considering
outsourcing.
Literature
Review
n Introduction
Given its proven record of
success in many different contexts, outsourcing has become something of a
mantra in modern public management.
Since the arrival of Reinventing Government and other works
emphasizing “entrepreneurial” government, outsourcing has grown tremendously
popular as a means of reducing costs, increasing efficiency, and improving
overall quality of service in public sector organizations.[2] Throughout the development of this new
perspective, we have learned a great deal from observing private sector
outsourcing practices.
The existing work on the private sector outsourcing practices and their
applicability within the public sector has provided a number of important
suggestions, precautions, case studies, and even some extensive models to guide
the outsourcing decision-making process.
The first section of this review describes the decision to outsource and
the literature that has addressed this initial step in the process. In fact, it has become quite clear that the
decision to outsource is actually arrived at by answering a number of important
questions about an organization’s core competencies and policy goals, coupled
with the availability of service providers, contract negotiations, and other
considerations. The private sector’s
“best practices” in this regard are then contrasted with the legal, economic,
and political considerations that must be made when applying these lessons to
the public sector. Although the policy
issue at hand centers on transportation, a number of important lessons have
been learned in other policy areas, and those lessons are also included
here.
The second section then considers the transition to outsourcing,
specifically the process of choosing a third-party provider once the firm has
decided to outsource. Again, the private
sector has provided a number of criteria, and in some cases, full
decision-making models to guide this process.
A number of important related considerations with regard to contractual
issues, labor agreements, and other management issues are also considered
here. The final section highlights the
methods by which both private and public sector firms conduct analysis and
evaluation of existing outsourcing agreements.
Again, the uniquely public aspects of this process are considered.
n
The Decision to Outsource
This section begins by
describing considerations private sector firms have identified as critical in
the early stages of the transportation outsourcing decision, particularly the
process of identifying core competencies.
It then highlights many of the precautions that should be taken in
crafting exclusively public sector outsourcing relationships, especially with
regard to goal setting and risk exposure.
Although very little work has been done specifically regarding public
sector functions that have the potential to be outsourced, public
administration researchers have put forth many important lessons learned from
research on outsourcing experiences with health laboratory services, human
resources, and information technology in public agencies.
Assessing Core Competencies
Most outsourcing decisions
begin with an assessment of the role that the function in question plays in
advancing the firm’s core competencies, functions, or mission. The underlying logic is simple – any function
the organization performs that is not essential to its mission, can, in theory,
be outsourced. However, assessing a
firm’s core competencies is often an ambiguous and difficult task. In response to that challenge, current
research on this phase of decision-making recommends that firms
simultaneously consider the functions that may benefit from outsourcing in
conjunction with the core competencies of third parties that could potentially
provide outsourced services. Again,
the logic is simple – unless a qualified provider can be identified for a
specific function, there may be no value added in considering an outsourcing
plan for that function. Goldsmith’s 1989
piece provided one of the first series of questions any firm should answer in
this regard.[3]
- What are the company’s most significant considerations:
Competitive position? Bottom-line
cost? Inventory control?
- Do we have adequate manpower for these functions? Do we have a knowledgeable staff, enough
support, and third party help?
- Have we made current cost-benefit analysis of internal staffing
versus outsourcing to accomplish our goals?
Using this sort of analysis,
the initial task for management in assessing outsourcing needs is to identify
areas where the firm can match its needs with the essential competencies of
potential third-party providers.
Copacino presents a similar framework to help managers assess the impact
outsourcing may have on operations at the strategic, structural, functional,
and implementational levels. [4] According to his framework, an outsourcing
plan must include:
·
An accurate definition of customer service
·
Some knowledge on competitors
·
Institutional flexibility to incorporate a speedy response to future
needs of the existing or new customers
Thus, works of this sort clearly indicate the importance of identifying
and connecting core competencies when making the decision to outsource.
Without a doubt, core
competency assessment in the public sector is more ambiguous, and as a result,
more difficult to execute. However, attempts
have been made, in policy areas outside of transportation, to provide managers
with a model for this sort of analysis.
A recent piece by Siegel, which addresses outsourcing of public
personnel functions, provides a model for assessing public agency core
competencies.[5] This four-phase model begins by examining the
delivery modes available for the services being considered for
outsourcing. He outlines a total of nine
potential modes, each incorporating a different mix of centralization and
competition between in-house, private sector, and intergovernmental service
providers. Once modes of delivery are
agreed upon, Siegel recommends an agency consider the availability of private
sector or intergovernmental vendors, restraints on service supply, contractor
reputations, regulatory legislation, and other factors as part of the decision
to outsource. The model then calls for a
procedural analysis of the service to be outsourced in order to seek and assign
an appropriate vendor for the service.
Also critical are evaluation and monitoring concerns.
Since private firms are driven by the profit motive, and often by a
clear business plan or mission statement, the incentive to outsource flows
directly from the efficiency gains and increased profits that occur as a result
of task specialization, economies of scale, refined scope of mission, and other
advantages realized through an outsourcing plan. However, in the absence of a “bottom line” in
public sector agencies, a number of other motives substitute for efficiency and
cost-savings. According to Prager:
“Contracting out government
services, in short, will neither reduce government outlays nor increase
government efficiency unless the decision makes economic sense. To be sure, a government authority may decide
that downsizing is a political, not financial or economic imperative. Or outsourcing may serve as a threat to
weaken the power of an entrenched bureaucracy or labor union. Or it may improve the short-term budget
picture. Yet, government authorities and
especially public sector managers, have a professional responsibility for
addressing the long term.”[6]
In spite of the best efforts of these and other researchers, the
ambiguity surrounding public agency missions often creates the potential for
misuse of outsourcing. This study
attempts to provide the public sector with new techniques and insights for
identifying their outsourcing needs from a “private sector perspective.”
A Few Precautions
In general, research that attempts to translate private sector
outsourcing lessons to the public sector has a decidedly skeptical and cautious
tone. While researchers in this vein
recognize outsourcing’s general advantages, they do not hesitate to point to a
number of uniquely public sector concerns that may extinguish outsourcing’s
advantages or in some cases even put the public at risk. The solution, they propose, is caution when
considering outsourcing ventures, as well as attention to accountability,
economies of scale, and competition.
A recurring theme in many
works on the subject is the need for accountability and oversight. This is due, critics claim, to the potential
for outsourced private sector service providers to “cut corners” and provide
sub-optimal levels of service in pursuit of profit. Although the private sector literature (which
is outlined later) recommends performance contracting to address this issue,
public sector firms may not have such an option available. In general, public sector outsourcing
practice recommends a strong monitoring mechanism, perhaps even through a third
party or oversight committee, be built into every outsourcing agreement.[7]
A recent study by Johnston
and Romzek describes a number of concerns about the management of outsourced
Medicaid contracts in Kansas.[8] In fact, they argue, the costs of monitoring
outsourced service contracts eliminated any benefit derived from the
reform. According to their analysis, the
same potential exists within all outsourcing agreements, especially in
situations where performance measures are absent. A similar effect has been observed in several
outsourcing efforts in which a lack of available third party providers
amplified existing inefficiencies.[9] In short, when outsourcing happens for the
sake of political rhetoric or other short-term gain, it may have the opposite
effect. Even more unfortunate, according
to Johnston and Romzek, is the observed tendency for public agencies to modify
their policy goals and expectations in order to appease an outsourcing
“crusade” or to match the service offered by a third-party provider.[10] Such practice, of course, is opposite
outsourcing’s intended effect.
n
The Transition To Outsourcing
After the decision has been made to outsource, there are a number of
issues that arise regarding the transition toward outsourcing. Evidence throughout the literature emphasizes
the importance of establishing a plan for moving forward on the outsourcing
decision. A study that was developed
from a survey of managers in Transportation and Distribution across the
United States addressed many of the prevalent issues regarding the transition
toward outsourcing.[11] Based on the survey results, Boyson et. al.
suggested a strategic approach to outsourcing.
This type of approach involves identifying long-term goals and
separating supply chain activities from core competencies, rather than focusing
on outsourcing single functions to correct for production deficiencies. The approach to outsourcing should evaluate
costs and potential process improvements that can be gained from obtaining a
third party service provider. Survey
results from the study suggested that these tasks are most effectively
accomplished through the use of internal knowledge capabilities.
Choosing, Contracting,
and Managing Relationships with Third Party Service Providers
In the private sector, the most prevalent reasons for outsourcing are
generally to reduce costs and increase revenues. Therefore, customer service capabilities and
the cost of services are primary factors in selecting third party
providers. The study by Boyson, et. al.
also addressed the issue of selecting an outside service provider for
outsourcing. According to the survey
results, gathering information on available providers has been most effectively
accomplished through in-house research and professional networks. The study also found that after a provider
had been chosen and contracted, the relationship between the organization and
the provider was most effectively managed through centralized systems that rely
on in-house managers to audit and monitor the outsourcing agreement. Although public sector organizations do not
necessarily have the goal of maximizing revenue, it is still essential to
consider reducing costs and maintaining high quality customer service when
choosing an outside service provider.
A second study developed
from a survey of third party service users in the United States identified
three major selection criteria for selecting third party (3PLs) service
providers.[12] In this study, Menon, et. al. identified the
first selection criterion as the perceived performance of the supplier. The perceived performance includes the
perception of on-time performance, the ability to meet promises, the
availability of top management, and excellent error rates. The second criterion, perceived capability,
is comprised of the perception of creative management and financial stability
of the provider. The third criterion
identified was the role of prices; however, the study suggested that
performance and quality requirements outweigh price considerations.
In a third study based on
survey results, Lieb identified an almost even division between cost and
service considerations as most important for selecting a third party service
provider.[13] Other considerations for selecting a provider
that were identified in the study include prior experience with the third
party, management capability, company reputation, and financial stability.
The contractual agreement is
central to the third party service provider relationship. In general, organizations are risk-averse
toward outsourcing relationships. The
study by Boyson, et. al. found that most contractual agreements include
preventative measures, which are often reflected through contractual clauses
that explicitly outline the relationship with the service provider including
the costs for services, provider responsibilities and provider performance
monitoring.[14]
In another government
outsourcing study, Behn and Kant focused on the development of a contractual
relationship with a third party service provider.[15] In the study, the authors made a distinction
between regulatory contracting and performance contracting. Regulatory contracting focuses on the
activities of the contractor. The
rationale behind regulatory contracting is that there is one best way to
fulfill a contract, the government knows the best way, the government is able
to specify in contract language all of the details of the best way, the vendor
will attempt to cheat the government, and government officials will collude
with vendors for personal gain if given the opportunity. Regulatory contracts are also not viewed as
effective outsourcing approach because they create few incentives for
contractors to achieve the public purpose of the contract. With a regulatory contract, neither the
agency nor the contractor is held accountable if the contract fails to produce
the desired outcome.
According to Behn and Kant, performance contracting is a more effective
approach to outsourcing because it creates incentives for the contractor to
achieve the desired result of the contract.
Performance contracting specifies the expected results, allows the
vendor to decide how to produce the desired results and only pays the contractor
when the results have been achieved. The
rationale behind performance contracting is that there are many acceptable ways
to fulfill a contract, and the best way to motivate contractors who will
implement that solution is to let them design it themselves.
Behn and Kant also indicated that there are a number of potential
problems associated with performance contracting. Performance contracting might inhibit
experimentation, encourage innovation in cost cutting but not service delivery,
stifle overachievement, not provide for start-up costs, inhibit symbiotic
relationships, reward promises but not performance, rely on outputs but not
outcomes, use measures that distort behaviors, and undermine equity and
fairness. However, there are a number of
strategies that agencies can use to overcome these potential problems. Performance contracting must involve
relationships that are linked to the mission of the organization, are easy to
measure, understand and reproduce, and that facilitate benchmarking. Behn and Kant also suggested that it is necessary
to frequently monitor many performance indicators in addition to those
specified in the contract. Finally, it
is important to pay vendors for significant progress and not just the final
outcome.
Aside from the transitional
decisions regarding service provider selection and the development of the
contractual relationship, the organization must give consideration to a number
of potential issues arising from the changing organizational climate that
occurs with the transition to outsourcing.
The study by Lieb, which was based on a survey of chief executives in
the 500 largest manufacturing companies, identified some relevant issues that
organizations should consider.[16] According to Lieb, the two most common
concerns regarding outsourcing are the potential loss of direct control over
activities being outsourced and uncertainty about the level of services to be
provided by the outside company. Other
concerns include estimating the true cost of third party services and the
potential internal problems that might result from the shift to outsourcing.
In the study, Lieb also noted that the most prevalent implementation
problem cited by the survey respondents was difficulty in convincing operating
personnel and managers to “buy in” to the third-party service program. It was noted that this problem was primarily
traced back to a lack of trust in the third party and concerns over job
security. Other implementation problems
identified by the survey included: difficulty integrating computer/information
systems, the third party’s lack of product knowledge, insufficient time for the
implementation process, and a lack of clear lines of differentiation regarding
third-party and internal responsibilities.
On the other hand, the survey results also revealed a number of benefits
experienced by companies using third party logistics providers, including: cost
reduction, improved productivity and improved service. Finally, the study indicated that companies
handled the displacement of personnel primarily through transfers to other
positions within the company and terminations.
In addition, a number of personnel were offered employment by the third
party provider.
An article by McIvor and
McHugh on the organizational changes resulting from the transition to a third
party service provider suggested a multifunctional organizational change
strategy that supports cultural issues and has support and commitment from top
management.[17] The strategy requires collaboration across
multiple levels in the organization.
Middle managers should be involved in helping people understand new
priorities and ways of operating. In
addition, employees at lower levels are involved and allowed to participate in
the transition so that they will “buy in” to the new values and systems that
affect their own work. According to
McIvor and McHugh, the perspectives and responses from employees at all levels
within the organization have a significant impact on whether the transition is
successful. Finally, the transition to
the third party provider and a new focus on quality and customer relationships
often requires changes in the cultural climate of the organization. Attention must be given to these changes
because performance is heavily dependent on the attitudes and commitment of the
employees within the organization.
Best Practices in Implementation
Doug Garr offered an article
on the current state of outsourcing practices and suggested a number of best
practice strategies to ensure successful partnerships with third party
providers.[18] Garr suggested that an organization should
ask several essential questions before outsourcing. In particular, it is important to ask whether
the relationship will reduce costs and improve efficiency in the organization. When looking for a service provider, an
organization should consider hiring an outsourcing consultant or at least
acquiring reliable legal assistance to negotiate the contract. However, an employee of the organization
should always remain an internal point person for searching for a provider.
Once a provider is chosen,
it is essential to clearly outline the complete scope of the services being
turned over to the third party provider and that the provider understand the
specifics of the contract. It may be
necessary to include a dispute resolution clause. It is also essential to consider the length
of the outsourcing agreement. For first
time agreements, it may be beneficial to keep the contract short with a renewal
clause at specific points. Finally, Garr
suggested that it is essential to have a clear set of objectives for the
outsourcer, and that the outsourcer has a strategic plan to achieve the
objectives. It may be necessary to
consider penalties for not meeting and/or achieving objectives and incentives
for exceeding them.
A study by Murphy and Poist
on user versus provider perspectives revealed the most important factors for
successful third party relationships.[19] According to the survey results, both third
party users and providers agreed that customer orientation and dependability
were the two most important factors for successful relationships. Customer orientation refers to being
responsive to customer needs.
Dependability refers to services provided in a consistent and reliable
manner. The third most important factor
for successful relationships from the provider perspective was change
orientation, which refers to the provider’s ability to adapt to a changing
business environment and develop contingencies to minimize system
breakdowns. Finally, the third most
important factor for the customer and fourth most important for the provider
was timeliness, services and information provided promptly.
Another study by Useem and
Harder on the management of outsourcing projects identified four necessary
capabilities in managers responsible for outsourcing initiatives.[20] Interviews of senior managers at twenty-five
companies indicated that strategic thinking is one required capability of
managers now that outsourcing has become more commonplace. Strategic thinking involves an understanding
of whether to outsource and how outsourcing that improves an organization’s
competitive advantage can be accomplished.
The second capability, deal making, refers to the ability of managers to
broker deals that secure services from external providers and ensure their use
by internal managers. The third
capability is partnership governing, which refers to the ability to effectively
oversee the outsourcing relationship after a contract has been established. Finally, it is essential for managers to be
able to manage change because organizations transitioning to outsourcing are
likely to encounter employee resistance.
Template
For Case Studies
n
General Information
Three separate questionnaires were developed to interview and survey
private sector manufacturers, third party service providers, and State
Department of Transportation divisions.
Surveys for the three groups took the form of written and electronic
questionnaires telephone interviews and on-site personal interviews. The interviews and surveys were developed to
recognize and document the unique issues facing each party as they approached
outsourcing decisions and implementation. The survey instrument was constructed
after referencing current industry literature and annual reports. A variety of
question formats were used including multiple choice, required ranking
attributes, and open-ended questions. Questions were intentionally designed to
be broad enough to be applicable to different manufacturing processes, yet
specific enough to capture outsourcing activities in a uniform and consistent
format.
The private and public sector organizations targeted for this study
were chosen for specific reasons. The
manufacturers and third party service providers were selected because of their
similarities to departments of transportation.
All of the manufacturing companies were known to outsource some of their
services. Although it was unknown
whether or not the departments of transportation outsourced, the state
departments of transportation that were surveyed were all cold weather states
with similar characteristics to the Region V states of Illinois, Indiana,
Michigan, Minnesota, Ohio, and Wisconsin.
Prior to the manufacturer and third party service provider interviews,
the research team collected the information about each individual company.
Sources of information included: the Internet, current periodicals, and trade
industry data. During the interview process, time was allowed for open-ended
discussions about specific unique project areas.
The original questionnaire was used as a pilot/test to interview the first private sector manufacturer. After this initial test, several modifications were made to simplify and clarify some of the open-ended questions and the interpretation of the information being reported. In particular, the survey was condensed and greater emphasis was placed on questions pertaining to outsourcing goals and objectives.
n
Private Sector Manufacturer Survey
The five private sector manufacturers surveyed included a motorcycle manufacturer, auto manufacturer, small engine manufacturer, asphalt company, and appliance manufacturer. This first survey was comprised of four sections. The questions in the first section of the survey were developed to identify the financial size and structure of the organization, with a focus on labor arrangements and manpower assignments in the areas of logistics and information technology. In addition, a brief history of the organization was recorded to assist in placing the responses in context. The second section targeted the identification of the organization’s outsourcing goals and objectives. The third section pertained to information requirements and collection issues faced during the outsourcing process. The final section was comprised of questions intended to gather information on the planning process, program development and implementation of the outsourcing program. A sample of the survey questions is provided in Appendix A.
n
Third Party Service Provider Survey
After the manufacturers were interviewed and the responses reviewed, a separate survey was developed to explore the Third Party Service provider’s perspective relative to outsourcing issues and practices identified by manufacturers. The two third party service providers surveyed included a small provider and a large provider. This second questionnaire was organized in the same four-section format with some questions modified to reflect the interview group. In addition, this second survey explored opinions about doing business with a government entity.
n
State Department of Transportation Survey
A total of 66 surveys were
sent to State Department of Transportation Secretaries/Commissioners, Deputy
Secretaries/Commissioners, Chief Highway Engineers, and Division
Directors. The state departments of
transportation surveyed included: Connecticut, Illinois, Indiana, Iowa, Kansas,
Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire,
New Jersey, New York, North Dakota, Ohio, Pennsylvania, Rhode
Island, South
Dakota, Vermont, Virginia, Wisconsin.
This third questionnaire followed the same four-section format, with
questions focusing on organization size, scope, goals, information, plans and
programs.
Case
Studies
The private and public sector organizations targeted for this study were chosen for specific reasons. The manufacturers and third party service providers were selected because of their experience with outsourcing and their similarities to departments of transportation. Although it was unknown whether or not the departments of transportation outsourced, the state departments of transportation that were surveyed were all cold weather states. These states were chosen based on their similar characteristics to the Region V states of Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.
n
Manufacturing Companies
Motorcycle Manufacturer
Description
This company is a
manufacturer of motorcycles and a distributor of parts to a global dealer
network of over 1,300 facilities in Europe, Japan, Australia, SE Asia, Latin
American and the United States. The Company’s annual revenue in 2000 was $2.2
billion of which $450 million was spent on logistics. Their parts distribution
process generates 1,200 orders per day and requires management of $60 million in
inventory. There are approximately 100 jobs involved in picking and delivering
the product and approximately 75 jobs in the packaging area. Quality and
superior customer service is the objective of this company headquartered in
Wisconsin.
Survey/Interview Findings
The motorcycle manufacturer outsources the following functions: parts
packaging and accessories, freight bill payment, advertising, and
communications. The primary focus of
outsourcing was to resolve the problem of excessive labor costs. With concerns
over loss of control and the primary goal of maintaining product and service
quality, the company considered customer perceptions in the decision to
outsource. Although loss of control was
a risk in developing an outsourcing program, the company expected that
outsourcing would result in improved information and process control. However, one of the barriers impacting the
outsourcing decision included obtaining financial information from the
providers. Although outside experts were not involved in the outsourcing
decision, selected providers were included in the planning process once the
outsourcing relationship had been established.
With financial stability, physical equipment and capabilities,
information technology, cost and quality as the most influential factors in the
outsourcing decision, the motorcycle manufacturer indicated that they selected
a provider using trade information. The
Director and Vice President participated in the development of the RFP that
included selection factors such as financial history, references, and project
work. This information was used to
review three to five potential providers.
Benchmarks of other similar companies in the industry were used to
evaluate the providers participating in the RFP selection. The Director was also involved in defining
the scope of the work.
The company also indicated that 200 performance measures were needed to
begin the outsourcing process. After an
initial assessment of current operations was conducted, outsourcing was introduced
within the parts packaging and distribution functional areas. Heavily reliant on senior leadership to
implement the outsourcing program, the company used customer surveys, industry
trade information, and internal operations, that had been outsourced 3-4 years
ago, as benchmarks for establishing goals for the recent outsourcing project.
Outsourcing was internally evaluated through multiple scorecards and
measures. Although it was an intense
process, the information was available internally and with suppliers and
vendors. Data was primarily collected by
internal process owners and managed with multiple internal programs. Internal process owners and managers
evaluated the information collected by comparing performance versus goals and
current performance versus past performance.
Performance reviews took place weekly, monthly, quarterly and annually
depending on the functions being reviewed.
Data for performance measurement was given to the provider by carriers,
suppliers, and vendors. In addition, the
provider was managed contractually with incentives/penalties for performance,
participation in gain sharing with exceptions managed on a daily basis. The most common point of friction centered on
the establishment of written expectations.
The multi-year relationship was introduced by a cross-functional
transition team over several months.
The primary change that was made to the data collection process for the
outsourcing project was an improvement in electronic collection and
analysis. With new programs introduced
by the provider, the results of outsourcing were increased customer
satisfaction and cost reductions. With
the most significant changes to the business resulting from outsourcing
including improved quality, lower costs, and an improved information system,
the company indicated that they would consider outsourcing other functions in
the future. The most important lessons
learned from the outsourcing experience were that the project was time intense
and that the provider brings additional skill sets and resources to the
process. Therefore, it is important to
recognize the value of relationship building with the outsource provider.
Finally, for state DOTs considering outsourcing, the motorcycle manufacturer
recommended that it is important to remember that managing the relationship
with the provider and maintaining trust are critical for successful
outsourcing.
Auto Manufacturer
Description
As a domestic automotive
manufacturer with global manufacturing and after market parts distribution
facilities, this company employs over 10,000 employees. This company is comprised of $8 billion
warehousing operation that serves more than 13,000 dealers and over 100
companies with parts. This division has $1.5 - $2 billion in annual
expenditures for logistics. Everyone is considered to be involved in logistics
in one form or another within this corporation.
Approximately 5% of the company is involved in technology or systems
support services. This company has been in operation over 90 years and outsources
transportation, freight bill payment, select pre-assembly manufacturing
functions, order fulfillment, and customer service functions. This company is
headquartered in Michigan.
Survey/Interview Findings
The auto manufacturer
indicated that they outsourced the following functions: outbound
transportation, freight bill payment, inbound transportation, cross-docking,
traffic management/fleet operations, information technology, order fulfillment,
customer service and selected manufacturing activities. The largest problem that the auto
manufacturer was attempting to resolve by outsourcing was improved control over
a large transportation and logistics networks.
With concerns over selecting the right provider and the primary goal of
cost reduction, the auto manufacturer considered the loss of internal expertise
in the area before making the decision to outsource. Since the largest risks of outsourcing are
loss of control and potential failure, internal organizational issues proved to
be primary barriers impeding the decision to outsource. Outside experts were not involved in the
outsourcing decision.
With the primary factors of
financial stability, business qualifications, reputation/references, and
chemistry and capability between the provider and the manufacturer as the most
influential in the outsourcing decision, the auto manufacturer indicated that
they selected a provider through an RFP process headed by senior managers and
an outside consultant. The RFP included
selection factors such as size, reputation and expertise. Fifteen potential providers were reviewed for
pre-screen and 5 providers for final review.
Responses to the RFP, interviews, and subsequent presentations were used
to evaluate the potential providers. An
internal team was involved in defining the scope of the work, while a statement
of expectations was used to define expectations. In addition, unique policies and procedures
were mutually established by the manufacturer and the provider.
The company also indicated
that the most important information needed to begin the outsourcing process was
establishing a good scope of the process.
Outsourcing was introduced through gap analysis,[21]
and providers were included in the planning process. An initial assessment of current operations
was conducted prior to embarking on the process. In addition, a formal transition team that
was dedicated to the process implemented the outsourcing project over one
year.
Using benchmarks of
professional knowledge and experience, the company indicated that outsourcing
was internally evaluated with rigid metrics written into the contract. The term of the relationship was a three-year
contract with renewal. The provider was
managed through the contract and statement of expectations with contractual
incentives/penalties for performance phased in over time, participation in gain
sharing and exceptions managed by empowered managers. Performance reviews took place daily for cost
reviews, weekly during implementation, monthly for projects going well, and
quarterly for control purposes. However,
the most common point of friction occurred when changes and new performance
measures were introduced. Approximately
half of the information used for performance measurement resided internally
with carriers, suppliers and vendors, while claims and return information was
found by manual collection and review.
Data was collected electronically by vendors and customers and managed
by the providers. The providers and
internal process owners used predictive, exception and tolerance to evaluate
and analyze the data.
The most significant change
in the data collection process was to move everything into a single data
system. With top-down leadership
implementing the outsourcing program, the company met its expectations of
improved metrics, technology and process.
With new programs introduced by the provider, the results of outsourcing
were improved cycle time and cost reductions.
The most significant changes to the business that occurred as a result
of outsourcing were improved visibility, capability and flexibility. In addition, the company indicated that
consideration of outsourcing other functions in the future would most likely be
personality driven by the company leadership.
The most important lessons learned from the outsourcing experience were
about people, change and attitudes. The
company learned that determining what defines success and streamlining the
measurement process could achieve improvement.
Finally, for state DOTs considering outsourcing, the auto manufacturer
recommended that it is important to know why you are outsourcing and to define
goals carefully.
Small Engine Manufacturer
Description
In 2000 this company
generated $1.3 billion in revenues. Over 7,000 employees were involved in the manufacturing
of small engines. Twenty people support information technology related tasks, 8
people are specifically assigned to traffic and transportation functions, 110
employees are directly involved in distribution in support of this small engine
manufacturer. They outsource transportation, freight bill payment and
cross-docking. This company is headquartered in Wisconsin.
Survey/Interview Findings
The small engine
manufacturer indicated that they outsourced the following functions: packaging
for retail items, outbound transportation, freight bill payment and inbound
transportation. In trying to resolve the
issues of high capital expenditures and excessive labor costs, financial issues
were the primary factor influencing the company’s decision to outsource. Outside experts were not involved in the
decision to outsource. In addition, the company indicated that the perceived
major risks to outsourcing were product quality, delivery performance and
flexibility.
With the primary factors of
cost, business qualifications, physical equipment and capabilities, and
chemistry and capability as the most influential in the outsourcing decision,
the small engine manufacturer indicated that they selected a provider through
references, site visits and a review process.
An internal cross-functional team participated in the development of the
RFP, which included selection factors such as price and delivery standards and
was used to review three potential providers.
Cost and performance were the primary factors used to evaluate the
providers. Sales and purchasing was
involved in defining the scope of the work, while performance standards in the
contract defined expectations. In
addition, unique policies and procedures were developed jointly by the
manufacturer and the provider.
The small engine
manufacturer indicated that competitive quotes were the most important
information needed to begin the outsourcing process. An initial assessment of current operations
was conducted prior to beginning the outsourcing process, with providers
included in the planning process. After
overcoming the major barrier of selecting a provider that would fit with the
company, outsourcing was introduced into the company almost immediately. In addition, a cross-functional transition
team managed the implementation of the outsourcing project.
The company indicated that
goals were established internally using performance measures such as fill rate
and on time deliveries as evaluative tools.
Delivery performance monitoring took place continuously with data for
performance measurement provided by the manufacturer. The provider was managed through monitoring
with contractual incentives/penalties for performance, participation in gain
sharing for the back order process and exceptions managed cooperatively through
crisis management. The most common point
of friction involved the back order process.
The term of the relationship was a three-year contract with renewal. Although some of the data was unknown and
left to the provider to define, the information resided in spreadsheet form and
was managed by SAP, an e-business platform.
Managers and analysts evaluated and analyzed the manually and
electronically collected data by monitoring the data and comparing competitive
bids.
Although the company was
concerned with process and control management, the company approached the
project with the primary goal of maintaining a competitive position by reducing
costs and labor expenses. In doing so,
the company was able to achieve the expected results of lower costs. With new programs introduced by the provider,
the results of outsourcing were new ideas, expanded skills and reduced
management time. The most significant
changes to the business resulting from outsourcing were improved responsiveness
and an opportunity for management to focus on core business. However, nothing changed in the data
collection process with the outsourcing project. Finally, the company indicated that they
would consider outsourcing other functions in the future.
The most important lessons
learned from the outsourcing experience were about packaging and process
management. The company indicated that a
lesson learned is to carefully evaluate and compare the variable cost drivers. Finally, for state DOTs considering
outsourcing, the company recommended that it is important to move slowly and be
open minded, accurate and thorough.
Asphalt Company
Description
This is a privately held
asphalt company. There are over 1,400 employees of whom 300 are non-union, full
time, and 1,100 are seasonal union employees. Ten people are involved in
information technology and 80 people are directly involved in logistics. This
company is headquartered in Wisconsin and has been addressing build, design and
repair issues for over 70 years. This company outsources transportation,
warehousing, selected manufacturing functions, asset maintenance, and some
information technology activities.
Survey/Interview Findings
The asphalt company
indicated that they outsourced the following functions: outbound
transportation, warehousing, inbound transportation, asset maintenance,
information technology and select manufacturing activities. The decision to outsource these functions was
an attempt to resolve a number of problems, including costly up-to-date
technology, insufficient capacity, poor performance, staffing issues, lack of
expertise and excessive capital expenses.
With concerns over exposure, control and knowledge transfer, the company
considered a number of factors in making the outsourcing decision, including
cost, workload, knowledge, time and equipment expenditures. The major barriers impeding the company’s
decision to outsource were control, quality and human resource issues. Finally, outside experts were not involved in
the decision to outsource.
With the primary factors of
business qualifications, strategic direction, operational excellence,
information technology and quality as the most influential in the outsourcing
decision, the asphalt company indicated that they selected a provider by
industry reputation, personal experience and interviews. The project manager, a consultant and the
vendor participated in the development of the RFP, which included selection
factors such as cost, performance, equipment, experience, skill sets and
management plan. The RFP was used to
review a range of one to fifteen potential providers, which were evaluated by
multiple interviews and reference checks.
A project manager and project team were involved in defining the scope
of the work, while the contract language and a statement of expectations
defined expectations. In addition,
unique policies and procedures were often developed for the specific
project.
The company also indicated
that an understanding of the process, costs and project scope were needed to
begin the outsourcing process. Prior to
outsourcing, an initial assessment of current operations was conducted with
providers involved in the planning process only. Finally, using industry standards, bids and
past experience as benchmarks for establishing goals, the outsourcing project
was internally evaluated by the user of the service with product quality,
performance and cost as the basis for evaluation. After addressing the primary risks of product
quality, cost and flexibility, outsourcing was introduced by a top-down
directive based on project specific past experiences. With the outsourcing transition management
depending on the scope of the project, a transition team was not used.
Performance monitoring was
not routinely conducted, but rather depended on the project. Data for performance measurement was provided
by the project team and included measures for quality, performance and
communication. All information was continuously available from regular
conversations during implementation, but officially resided with internal
associates familiar with the work.
Suppliers, vendors and project managers collected the data, which was
managed by critical path, Gantt charts, quality assurance (QA) sampling, and
site monitoring systems. Project
managers, the outsourcing team, and steering committees evaluated and analyzed
the data by using comparisons to industry standards, industry trends,
specification, and trend analysis. The
provider was managed through meetings with no contractual incentives/penalties
for performance, occasional participation in gain sharing and exceptions
managed by working together as a team.
The most common point of friction involved the integration of staff and
human resources. The term of the
relationship was year to year.
The primary change that
occurred in the data collection process from outsourcing was that the vendors
supplied more data electronically. The
primary goals and objectives when the outsourcing began were cost reduction,
improved knowledge and reduced labor costs.
However, the company indicated that they did not always achieve the
expected results of improved quality, knowledge transfer, lower costs and
improved performance. With new programs
introduced by the provider, the results of outsourcing were that the providers
tended to grow into additional project areas and increased dependence of staff
on outside consultants. The most
significant changes that occurred, as a result of outsourcing, were improved
performance and efficiencies. The
company indicated that they would consider outsourcing other functions in the
future.
The company indicated that
the lessons learned from the experience were to develop tighter project
definitions, conduct more up-front planning, work more closely with vendors and
maintain regular review meetings. In
particular, the company learned that the expectation setting was critical,
initial requirements needed to be well defined, and the change control process
was critical. Finally, for state DOTs
considering outsourcing, the asphalt company recommended that state DOTs should
outsource maintenance to outside contractors rather than the counties.
Appliance Manufacturer
Description
This $10.3 billion appliance
company is headquartered in Michigan with 8 regional distribution centers in
North America with over 366 power units and 1,136 trailers. Fifty-six managers
supervise 1,438 employees directly involved in logistics. Over 12% of their
employees are involved in technology support and information functions. This
company has been in business for over 90 years with operations in over 170
countries worldwide. They outsource transportation, freight bill payment,
warehousing, selected manufacturing processes and information technology.
Survey/Interview Findings
The appliance manufacturer indicated that they outsourced the following
functions: outbound transportation, inbound transportation, warehousing,
distribution, private fleet assets and information technology. In trying to address the problems of
technology and performance inefficiencies and concerns over control and
effectiveness, the company based much of the outsourcing decision on
competitive threats. After admitting
that the company was in need of improvement, the company established goals and
objectives for outsourcing, which included enhancing technology, reducing
costs, sharing risks and leveraging multi-client opportunities. Outside experts were not involved in the
decision to outsource.
With the primary factors of financial stability, business qualifications,
reputation/references, operational excellence, and chemistry and compatibility
as the most influential in the outsourcing decision, the appliance manufacturer
indicated that they selected a provider with a series of intensive interviews
after an initial qualification scan. A
cross-functional management team participated in the development of the RFP,
which included selection factors such as skills set, size and track record. The RFP was used to review eight potential
providers, which were evaluated by the RFQ and interviews. A cross-functional management team was
involved in defining the scope of the work, while the contract language and a
statement of expectations defined expectations.
In addition, policies and procedures were tailored to the specific
project with respect to industry data and trends.
The company also indicated that a good definition of the project scope
and expectations were needed to begin the outsourcing process. An initial assessment of current operations
was conducted prior to outsourcing, and providers were involved in the planning
process. Using industry standards,
current literature and technical research studies as benchmarks for
establishing goals, the company indicated that outsourcing was internally
evaluated by a cross functional team.
After overcoming the major barrier of defining the project, the company
relied on a structured approach by functional area to introduce outsourcing
through the identification of external resources and outside skills that were needed
to achieve the goal. With a multi-year
contract, a transition team lead by the provider implemented the outsourcing
project over several months. In doing
so, the company was able to accomplish its expected results of network
optimization and enhanced information capabilities.
Performance reviews took
place daily, weekly, and monthly depending on the aspect being measured. However, exception areas were measured more
frequently. Data for performance measurement
was provided by vendors and the provider and was measured with detailed
performance measurement and reviews. The
provider was managed with regular reviews of contract expectations with
contractual incentives/penalties for performance, participation in gain sharing
and exceptions managed collaboratively.
The information and new measures that were introduced were available and
resided across many internal systems and with the providers. The data was collected by the provider,
gathering information from suppliers, vendors and internal customers and was
managed using gap analysis, Gantt charts and Six Sigma Quality measurements.[22] The senior management team of the provider
and the manufacturer evaluated and analyzed the information using comparisons
to industry standards and measuring performance against the project plan.
The most significant change
that occurred in the data collection process was a greater amount of electronic
integration. With new programs
introduced by the provider, the results of outsourcing were improved cycle times,
information visibility and reduced costs. With an improved competitive position
in the industry resulting from outsourcing, the company indicated that they
would consider outsourcing other functions in the future.
The most important lessons
learned from the outsourcing experience were that the establishment of a
positive relationship and trust were critical to the success of the
project. In addition, the company
indicated that if given the opportunity again, they would make the outsourcing
decision earlier. Finally, for state
DOTs considering outsourcing, the appliance manufacturer recommended that the
decision to outsource is based on trust as the key to a good relationship.
n Third
Party Service Providers
Small Provider
Description
This service provider is
headquartered in Wisconsin and only performs services for member companies.
They are a non-profit $19 million company. The company was started by 34 paper
executives interested in boxcar consolidation and has expanded to a full
service logistics firm with warehouse capabilities. They purchase over $12.5
million in transportation services for member companies.
Survey/Interview Findings
The small third party
service provider indicated that they provided the following outsourcing
services: outbound transportation, inbound transportation, freight
consolidation and distribution, cross-docking and information technology. The most common goals of outsourcing were
cost reduction and performance improvement. Similar to the responses of the
manufacturing companies, the provider indicated that outside experts were not
involved in the decision to outsource.
Having identified the primary risk of outsourcing as loss of control,
the company indicated that insufficient volumes to operate and a poor economy
have proven to be barriers impeding the outsourcing decision.
By targeting clients on the
basis of geography and commodity, the company considers the client’s core
competence, size and location when deciding to participate in a Request For
Proposal (RFP) or Request For Quotation (RFQ).
With the most significant factors of financial stability, physical
equipment and capabilities, operational excellence and quality influencing the
selection decision, the company indicated that they selected and reviewed
carriers and subcontractors with the use of quality program factors. In addition, the company performs an initial
assessment of the client’s operations prior to embarking on the outsourcing
process. This assessment typically
involves an evaluation of electronic information capabilities and quality
measurement program. Expectations were
typically defined by a core carrier program, policies and procedures, and
through the contract language. Policies
and procedures were uniquely established to reflect the client’s interest based
on provider standards. The company
indicated that a limited number of the client’s existing carriers were retained
once the provider was fully transitioned in to the new service delivery
process.
The company also indicated
that one of the greatest challenges for outsourcing was to link carriers
electronically and establish reporting standards. Data originating in multiple sources was
reconciled by carrier feedback and review sessions and through a comparison of
the carrier data to the order entry system.
Generally, the carriers and customers provided the information, while
the outsource provider retained the information on a confidential basis. Finally, the company indicated that
performance was analyzed by comparing performance to expectations serving as
benchmarks.
Five separate areas of
performance were measured electronically as part of a daily process and
formally on a quarterly basis with annual review. The carrier and the provider both provided
the data for measurement. In addition,
exceptions were managed through immediate identification on the provider’s
website and through a CRM system. Price
issues were the most common point of contention.
Using university research, a
quest for quality work and industry standards as benchmarks for establishing
goals, the company indicated that they typically achieve lower costs and
improved service for their clients.
Finally, the company offered the following points for state DOTs
considering outsourcing:
§
The relationship is critical.
§
Communication is essential.
§
The outsourcing project never works as originally intended.
§
Maintain an on-going dialogue.
Large Provider
Description
This $5 billion
service provider employs over 30,000 employees globally and is over 73 years
old. They are headquartered in Florida and provide full service lead logistics
solutions featuring multimodal transportation services, freight bill payment,
warehousing, freight consolidation and cross-dock operations. They have a
subsidiary that performs product assemblies.
Survey/Interview
Findings
The large third party
service provider indicated that they provided the following outsourcing
services: outbound transportation, freight bill payment, warehousing, inbound
transportation, freight consolidation and distribution, cross-docking, asset
maintenance, traffic management and fleet operations, and product assembly.
With competitive situations, their own experience and industry standards the
most common benchmarks for establishing goals, the company agreed with the
small provider in that cost reduction and performance improvement are the most
typical goals of outsourcing. The
primary barriers impeding the decision to outsource were technological
limitations in overseas countries and a lack of a mature international
transportation network.
By targeting clients on the
basis of internal targeted research, the company indicated that they considered
the client’s size and complexity as well as their own ability to influence
change within the client’s company when deciding to participate in an RFP or
RFQ. With the most influential factors
of management depth and strength and physical equipment and capabilities, the
company indicated that they selected and reviewed carriers and subcontractors
by looking for the best in class and considering who was best positioned to
deliver. Contrary to the manufacturing
company responses, the provider indicated that, as outside experts, they were
often involved in the client’s decision to outsource. Expectations were defined through the
negotiated scope of work, within the contract language and with the use of Key
Performance Indicators. Policies and
procedures were established by integrating customer and provider minimum
standards.
An initial assessment of the
client’s operations was conducted by two different SWOT [23]
teams, who learn as much as possible about the client’s company and then
compare notes. When the new process is
implemented, the provider attempts to maintain continuity; therefore, a blended
solution is achieved with respect to retaining the client’s existing carriers.
Key measures for carrier
performance included the cost, timeliness of services, information accuracy and
speed of feedback. The company indicated
that outsourcing performance was typically measured through contract terms,
gain and pain sharing, and Specific Key Performance Indicators. Performance was reviewed weekly and monthly
depending on event basis and supply chain complexity. In addition, exceptions were managed with
solutions based on a snapshot in time.
The carriers generally provided the data and self-diagnosis, while the
provider reconciled the data against the order entry. The company indicated that it was necessary
to first understand the data and then overlay it with source data. For example, data that originated from
multiple sources was reconciled by first understanding the data source and how
and why the measurement was being used, and secondly by using best practices in
the industry to identify and reconcile the data. Typically, the carriers and customers
provided the data, while the provider maintained ownership of the data;
however, the ownership of the data was becoming more collaborative. Empowerment at the shop floor was critical. Friction points most commonly occurred during
performance reviews.
Aside from the risks of
insufficient research, inaccurate data and the potential for “getting it
wrong”, the company typically achieves the results identified through the
Specific Key Performance Indicators.
Finally, the company offered the following recommendations for state
DOTs considering outsourcing:
§
Do not send out an excessive number of RFPs.
§
Consider your goals carefully.
§
Carefully define deliverables.
§ Identify key people within the organization.
n State
Departments of Transportation
A total of 66 surveys were
sent to State Department of Transportation Secretaries/Commissioners, Deputy
Secretaries/Commissioners, Chief Highway Engineers, and Division
Directors. Thirty-one surveys were
returned for a total response rate of 47%; however, only 28 of the 31 returned
surveys were completed sufficiently to be usable. Since there were multiple respondents for
some of the states, the survey responses were aggregated and described by each
state that participated in the survey.
The following states participated: Connecticut, Iowa, Kansas, Maine,
Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, North
Dakota, Pennsylvania, Vermont, and Wisconsin.
The survey responses for each of these states are discussed below. A summary of survey responses by each
individual transportation division is shown in Appendix D, E, F, and G.
Connecticut
Description
Connecticut subcontracts 68%
of engineering and 10% of maintenance to private firms, while the state DOT
provides the remaining 32% of engineering, 100% of asset management, and
comprises 90% of maintenance providers.
Managed assets were valued at about $543 million, while the remaining
managed inventory had a value of $6.8 million.
Survey/Interview Findings
The division in Connecticut
responding to the survey indicated that no functions were currently outsourced
within the division. However, the
division indicated that the primary risks of outsourcing were considered to be
long-term cost overruns, response to emergency situations and direct control
over the finished product. Outside
experts were not involved in consideration of outsourcing. In addition, the division indicated that
government regulations, labor agreements and current workload were the most
significant barriers impacting the decision to outsource. The division did indicate that the most
common goal for outsourcing would be safety and minimizing risk, which was
based on the benchmark of previous contract history within the state DOT
framework. Finally, the division did
indicate that research of other state activities, expenditures, and labor
issues would likely be necessary to begin the outsourcing process.
The division indicated that
financial stability, business qualifications, cost and quality were most
influential in the selection of providers in the past. Provider expectations were detailed through
an open working relationship with the end deliverable defined by the budget and
time. Policies and procedures were
established primarily by using existing policies. With performance measured weekly, superior
performance was rewarded with honorary awards.
The following items were included on the scorecards: on-time performance,
product quality, capacity and capability to perform work and responsiveness. The most common points of friction were
centered on increased inspections and administrative and labor issues.
The division also indicated
that the quality of the results achieved from previous outsourcing had been
equivalent to work performed by the state.
As such, the division in Connecticut indicated that state DOTs should
outsource to assist state forces when required by workload levels and when
specialized equipment is needed that the state does not own.
Iowa
Description
The division in Iowa
comprises 87.6% of maintenance providers and is responsible for 64% of
engineering and all materials management.
Private firms are subcontracted 12% of maintenance and 36% of
engineering, while the county or other state agencies only provide 0.4% of maintenance. Managed assets were valued at about $93
million with an additional $5 million in other managed inventory.
Survey/Interview Findings
The division in Iowa
indicated that they outsourced professional and technical consultant
services. With the primary identified
risks of quality, cost and time, the most significant barriers impacting the
decision to outsource were current workload, quality constraints and
outsourcing expertise. External experts
were not involved in the decision to outsource.
Using previous contract history within the state DOT framework as a
benchmark, the typical outsourcing goals were available work force, performance
improvement and cost reduction.
The transportation division
indicated that the following factors were most influential in the selection of
a provider: business qualifications, reputation/references, information
technology, cost, quality, attitude and compatibility, and previous experience
with the provider. Provider
expectations, which were generally defined within one or two meetings, were
developed through an open working relationship with the end deliverable defined
by the budget and time. Policies and
procedures were established primarily by using existing policies. With performance measured annually, superior
performance was rewarded with more business given to the provider. The following items were included on the
scorecard: budget accuracy, on-time performance, product quality, capacity and
capability to perform work and responsiveness.
The most common points of friction centered on quality control and
cost.
The division also indicated
that because of the experience of outsourcing for many years, there was no need
for specific information to begin the outsourcing process. However, access to information did not
improve as a result of outsourcing. The
division also indicated that the quality of the results achieved by outsourcing
were both equivalent to and lower than work performed by the state. Finally, the division in Iowa suggested that
the following areas should be outsourced by state DOTs: projects requiring
special expertise, large projects with tight timeframes, and projects when
staff is not available.
Kansas
Description
The division in Kansas
managed 100% of assets and made up 90% of the maintenance providers. The remaining 10% of maintenance providers
and 75% of engineering were subcontracted to private firms. The state DOT provided 20% of engineering,
while the remaining 5% was subcontracted to the county or other state agency. Managed assets were valued at about $173
million with an additional $65 million in other managed inventory.
Survey/Interview Findings
The Kansas division
indicated that they outsourced asset maintenance and information
technology. Concern for the most
significant risks of quality control, cost and procurement time resulted in
quality constraints and control of output being the primary barriers impacting
the decision to outsource. Outside
experts were not involved in the decision to outsource. With the use of previous contract history
within the state DOT framework, the division established goals for outsourcing
of labor issues and performance improvement
The division indicated that
business qualifications, physical equipment and capability, quality, and
previous experience with the provider were most influential in the selection of
a provider. Defining provider
expectations varied with the complexity of the services to be provided. In general, expectations were specifically
documented standards with performance ratings and calibration, while policies
and procedures were established through the use of existing policies. With performance measured monthly, superior
performance was rewarded monetarily and with future contract preference given
to the provider. The following items
were included on the scorecards: on-time performance, product quality,
administrative accuracy, budget accuracy, capacity and capability to perform
work and responsiveness. The most common
points of friction were employee resistance and concern for their jobs and
workload pressures with limited staff.
The division also indicated
that needs determinations, requirements definitions and internal cost estimates
were necessary to begin outsourcing. The
divisions also indicated that access to information was improved as a result of
outsourcing. In addition, the quality of
the results achieved by the outsourcing project were equivalent to work
performed by the state. Finally, the
division in Kansas suggested that the following areas should be outsourced by
state DOTs: heavy and/or specialized maintenance activities, engineering
investigations and information technology development.
Maine
Description
The division in Maine
provides 98% of maintenance, 70% of engineering and all of the asset and
materials management. All other services
are subcontracted to private firms.
Managed assets were valued at about $78 million. Maine also manages additional inventory of
$126 million.
Survey/Interview Findings
The division in Maine that
participated in the survey indicated that they outsourced information
technology. The primary risks to
outsourcing were quality, cost and schedule.
The major barriers impacting the decision to outsource were labor
agreements and the project size and scope.
Outside experts were not involved in the decision to outsource. The typical goals of production, performance
improvement and cost reduction were established on the basis of previous
contract history within the state DOT framework and goals established by
regulation.
The division indicated that
business qualifications, cost and quality were most influential in the
selection of a provider. Defining
provider expectations typically varied with the scope of the project, but was
generally loosely structured naming key areas of desired performance and
quality. Policies and procedures were established primarily by using existing
policies. With performance measured
monthly, superior performance was rewarded monetarily. The following items were included on the
scorecard: on-time performance, product quality, capacity and capability to
perform work and responsiveness. The
most common points of friction centered on the scope of services, cost and
schedule.
The division also indicated
that a reliable analysis of human resource demand was necessary to begin the
outsourcing process. In addition, access
to information improved as a result of outsourcing. The division also indicated that the quality
of the results from outsourcing were equivalent to work performed by the state.
Finally, the division indicated that the following areas should be outsourced
by state DOTs: engineering and related services, transportation project
construction, and technology development.
Massachusetts
Description
According to the divisions
in Massachusetts that responded to the survey, 44%-50% of maintenance was
subcontracted to private firms, 1%-4% were subcontracted to the county or other
state agencies, and 49%-52% were done by the state DOT. The state DOT managed about 90% of assets and
materials, while the remaining 10% of asset management and materials management
was evenly divided between private firms and the county or other state
agencies. The majority of engineering
(75%-85%) was subcontracted to private firms, while only 5% of engineering was
subcontracted to the county or other state agency. These divisions noted that the amount of
assets managed had values that ranged from $28.5 million to $100 million, while
the remaining managed inventory valued at a range of $4.5 million to $15
million.
Survey/Interview Findings
The transportation divisions
in Massachusetts indicated that they outsourced the following functions: fleet
management, asset maintenance, information reporting, information technology,
and inventory management. With the
primary risks of political opposition, labor issues, loss of quality control,
and costs, the most significant barriers impeding the outsourcing decision were
government regulations and labor agreements.
The involvement of outside experts in the decision to outsource depended
upon the division that was outsourcing.
The divisions used previous contract history within the state DOT
framework, benchmarks suggested by providers and goals established by
regulation to establish the typical goals of performance improvement and cost
reduction.
The transportation divisions
also indicated that the following factors were most influential in the
selection of a provider: business qualifications, reputation/references,
operational excellence, quality, safety record, financial stability, physical
equipment and capabilities, and cost.
Provider expectations, which took approximately one year to define, were
both specifically documented standards with performance rating and calibration
and measured performance standards that carried financial penalties and
incentives. Policies and procedures were
established through the use of existing division policies. With performance measured weekly or monthly
(depending on the division), monetary awards for superior performance were
sometimes given to providers. The
following items were included on the scorecards: on-time performance, product
quality, administrative accuracy, budget accuracy, capacity and capability to
perform work and responsiveness. The most
common points of friction were political and labor opposition.
One of the survey
respondents indicated that information on past performance of the provider and
the cost of the public sector work were necessary information to begin
outsourcing. Another respondent
indicated that for maintenance outsourcing it was necessary to prove that
outsourcing was more cost effective than services provided in-house. In addition, the contracts were competitively
bid. Both survey respondents indicated
that the access to information has improved as a result of outsourcing.
Finally, the divisions
indicated that the quality of the results achieved by the outsourcing project
were higher than work performed by the state.
The divisions also suggested that the following areas should be
outsourced by state DOTs: maintenance, asset management, legal work, drawbridge
operation, mowing and sweeping, and police detail such as traffic control.
Michigan
Description
The divisions in Michigan
that responded to the survey indicated that 60% of maintenance was
subcontracted to the county or other state agencies, 25% were done by the state
DOT, and 15% were subcontracted to private firms. The state DOT is also responsible for 100% of
asset and materials management. Depending
on the division, approximately 25%-60% of engineering is subcontracted to
private firms, while the remainder is done by the county or other state agency.
Finally, one of the divisions indicated that their managed assets were valued
at $8 million.
Survey/Interview Findings
According to the Michigan
transportation divisions surveyed, the only function that is currently
outsourced is appraisal services within the division. With concerns over the risks of losing
critical core competencies, cost of controls, quality outputs, loss of direct
project control, untimely delivery and insufficient budgets, the most
significant barriers influencing the decision to outsource were government
regulations, labor agreements, and quality constraints. The involvement of outside experts in the
decision to outsource depended upon the division that was outsourcing. The divisions used benchmarks discussed in
university studies, previous contract history within the state DOT framework and
goals established by regulation to establish the most common outsourcing goals
of performance improvement, cost reduction and labor issues.
The following factors were
most influential in the selection of a provider: financial stability, business
qualifications, previous experience with the provider, reputation/references,
operational excellence, cost, quality, and attitude and compatibility. Provider expectations, which took six months
to one year to define depending on the project type and services being
outsourced, were established through an open working relationship with the end
deliverable defined by budget and time constraints. Policies and procedures were established
through the use of existing division policies and by developing unique policies
to manage the specific outsourced task.
With performance measured monthly and when the project is completed;
superior performance was rewarded with more business and future contract
preference given to the provider. The
following items were included on the scorecards: on-time performance, product
quality, budget accuracy, capacity and capability to perform work and
responsiveness. The most common points
of friction were centered on the amount of effort to perform the work,
performance of work without authorization, timely delivery of a quality product
and defining what is an acceptable product.
The divisions indicated that
information on the industry’s capacity to handle the workload, experienced
staff, and equipment quality and capacity were needed to begin the outsourcing
project. In addition, federal laws and
regulations, state laws and state policies were consulted prior to
outsourcing. Finally, a list of
available and interested appraisers was necessary to begin the project. The divisions also indicated that access to
information improved as a result of the outsourcing project.
Finally, judging the quality
of the results achieved in the outsourcing project depended upon the division
that was outsourcing. Although most of
the results were equivalent in quality to work performed by the state, some of
the results were both lower and higher quality than the work performed by the
state. Finally, the divisions suggested
that the following areas should be outsourced by state DOTs: non-professional services
where selection is based on price, where special expertise is required, to meet
peaks in workload, in developing a legal description, appraisal services and
billboard permit management.
Minnesota
Description
According to the divisions
from Minnesota, the state DOT comprises approximately 90% of maintenance
providers. In addition, the state DOT is
responsible for 70%-100% of asset management, 70% of engineering, and 20% of
materials management. Private firms were
subcontracted for all other services not provided by the state DOT. Managed assets were valued at about $100
million with an additional $12.6 million in other managed inventory.
Survey/Interview Findings
The division in Minnesota
that responded to the survey indicated that they outsourced warehousing,
material distribution and inventory management.
With concern over the risks of loss of future expertise, loss of quality
control and added inspection costs, the division indicated that government
regulations was the most significant barrier impacting the decision to outsource. Outside experts were not involved in the
decision to outsource. Using previous
contract history within the state DOT, the typical goals of cost reduction and
safety/risk were established for outsourcing.
Business qualifications,
reputation/references, physical equipment and capability, quality, and attitude
and compatibility were the most influential factors in the selection of a
provider. Provider expectations, which
are continually defined through an ongoing process, were loosely structured
naming key areas of desired performance and quality. Policies and procedures were established
primarily by using existing policies.
With performance measured annually, superior performance was rewarded
with monetary and honorary awards. The
following items were included on the scorecards: administrative accuracy,
on-time performance, product quality, capacity and capability to perform work
and responsiveness. The most common
points of friction resulted form contract specifications and coordination between
the owner and prime contractor and subcontractors.
The division indicated that
clear specifications of the scope of the work, contractor qualifications and a
clear scope of responsibilities were necessary to begin the outsourcing
process. In addition, access to
information was improved as a result of outsourcing. The division also indicated that the quality
of the results achieved by the outsourcing project were equivalent to work
performed by the state. Finally, the
division in Minnesota suggested that the following areas should be outsourced
by state DOTs: highway and buildings constructions, highway and building
design, and computer system design and execution.
Missouri
Description
The survey respondent from
Missouri indicated that 85% of maintenance was done by the state DOT, 13% was
subcontracted to private firms, and 2% was subcontracted to the county or other
state agency. The state DOT was
responsible for all of the asset and materials management, while engineering
was evenly divided between the state DOT and private firms. Managed assets were valued at about $335
million, while the remaining managed inventory had a value of $199.4
million.
Survey/Interview Findings
The transportation division
in Missouri that participated in the survey indicated that they outsourced
material distribution and information technology. Outside experts were involved in the decision
to outsource, and the division used previous contract history within the state
DOT framework to establish goals for the outsourcing projects.
Business qualifications,
physical equipment and capability, cost and other business contacts were most
influential in the selection of a provider for the transportation division from
Missouri. A provider expectation, which
was a five-year process, was loosely structured naming key areas of desired
performance and quality. In addition,
unique policies and procedures were developed to manage the specific outsourced
task. With performance measured
annually, superior performance was rewarded with honorary awards and more
business given to the provider. The
following items were included on the scorecards: on-time performance, product
quality, administrative accuracy, budget accuracy, capacity and capability to
perform work and responsiveness. The
most common points of friction were contractor claims from differences of
opinion and agreeing on the quality of the final product.
The division indicated that
a read-through of the American Association of State Highway and Transportation
Officials (AASHTO) contracting guidelines was necessary to begin the
outsourcing project. In addition, access
to information did improve as a result of outsourcing, and the quality of the
results achieved by outsourcing were equivalent to work performed by the
state. Finally, the division in Missouri
suggested that the following areas should be outsourced by state DOTs: bridge
painting, asphalt overlays, and row mowing.
Nebraska
Description
According to the divisions
from Nebraska, 90%-100% of the maintenance was done by the state DOT, while a
small portion was subcontracted to private firms and the county or other state
agency. The state DOT was responsible
for 100% of asset and materials management, and 40%-70% of engineering. The remaining 30%-40% of engineering was
subcontracted to private firms. Managed
assets were valued at about $60 million, while the remaining managed inventory
had a value of about $2 million.
Survey/Interview Findings
The transportation divisions
in Nebraska indicated that they outsourced warehousing and material
distribution. With the primary risks of
loss of quality control, degradation of skills and increased cost, the most
significant barriers impacting the decision to outsource were current workload,
quality constraints, control of output and the project size and scope. With the use of outside experts in the
decision to outsource, the most typical goals established for outsourcing were
labor issues and cost reduction. The
divisions also indicated that previous contract history within the state DOT
framework, benchmarks suggested by providers and goals established by
regulation were used to establish the goals for outsourcing.
The transportation divisions
from Nebraska indicated that the following factors were most influential in the
selection of a provider: business qualifications, reputation/references,
operational excellence, quality, attitude and compatibility and previous
experience with the provider. Provider
expectations, which are in the process of being defined, are loosely structured
naming key areas of desired performance and quality and are being developed
through an open working relationship with the end deliverable defined by the
budget and time. Policies and procedures
for managing the specific outsourced task were both uniquely developed and
established through the use of existing policies. With performance measured weekly and at key
project milestones, superior performance was rewarded with monetary awards, future
contract preference and more business given to the provider. The following items were included on the
scorecards: on-time performance, product quality, administrative accuracy,
budget accuracy, capacity and capability to perform work and responsiveness. The most common points of friction were
centered on establishing appropriate oversight, resolving disputes over
performance, consultant direction and detailed specifications.
Although one of the two
divisions that responded to the survey indicated that they did outsource some
functions, neither division indicated what information was necessary to begin
the outsourcing process. However, the
divisions did indicate that they did not expect that access to information
would improve as a result of outsourcing.
The quality of the results achieved by the outsourcing project have been
either equivalent to or lower quality than work performed by the state
depending on which division that was outsourcing. Finally, the divisions in Nebraska indicated
that the following areas should be outsourced by state DOTs: research,
construction, rest area management, mowing and striping.
New Hampshire
Description
The New Hampshire state DOT
provides 98.5% of maintenance, while the additional 1.5% is subcontracted to
private firms. All of the materials management
and 34% of the engineering is also provided by the state DOT, while the
remaining 66% of engineering was subcontracted to private firms. Managed assets were valued at about $38
million with an additional $1.5 million in other managed inventory.
Survey/Interview Findings
The division from New
Hampshire that responded to the survey indicated that they recently began and
are in the process of implementing the first outsourcing projects of asset
maintenance and road/bridge construction.
The primary goal of implementing the outsourcing projects was to achieve
cost reductions. With concerns over the
risks of quality, responsiveness to the public and loss of internal expertise,
the most significant barriers impacting their ability to outsource were quality
constraints and control of output. The
division did not indicate what information was needed to begin the outsourcing
project, or if access to information has improved as a result of outsourcing.
Business qualifications and
reputation/references were the most influential factors in selecting a
provider. In addition, the quality of
the work and costs were the most common points of friction in developing the
new outsourcing relationship. Finally,
the division suggested that the following areas should be outsourced by state
DOTs: asset management development, ITS development, and deployment and
disaster planning.
North Dakota
Description
North Dakota’s state DOT
provides 63% of maintenance, 52% of engineering, 95% of materials management
and all asset management services. All
other services are subcontracted to private firms. In addition, managed assets were valued at
about $62.4 million with an additional $12 million in other managed inventory.
Survey/Interview Findings
The division in North Dakota
indicated that the following functions are outsourced: information technology,
inventory management, and construction and design engineering. With concerns over the risks of quality
control, timely product delivery, and cost, the most significant barriers
impacting the decision to outsource were quality constraints, control of
output, current workload and project size and scope. Outside experts were not involved in the
decision to outsource. The benchmarks
used to establish outsourcing goals included previous contract history within
the state DOT framework, standards suggested by providers, and goals
established by regulation. The most
common goals established for outsourcing were to overcome a shortage of
in-house staff, safety/risk and performance improvement.
The transportation division
indicated that business qualifications, quality, and attitude and compatibility
were most influential in the selection of a provider. Defining provider expectations is an ongoing
process that the division continues to work on.
Expectations were detailed both loosely structured naming key areas of
desired performance and quality and through measured performance standards with
financial penalties and incentives.
Policies and procedures were established primarily by using existing
policies. With performance measured
monthly, superior performance was rewarded by future contract preference and
more business given to the provider. The
following items were included on the scorecard: budget accuracy, on-time performance,
product quality, capacity and capability to perform work and
responsiveness. The most common points
of friction occurred in communication regarding quality control and conformance
to DOT standards.
Updated process and
procedure manuals and information on in-house workload and expertise were
necessary to begin the outsourcing process.
Although access to information improved as a result of outsourcing, the
division indicated that the quality of the results achieved by outsourcing were
lower than work performed by the state.
Nonetheless, the division suggested that the following areas should be
outsourced by state DOTs: specialty items where the state does not have the
expertise and to meet demands when there are peaks in funding.
Pennsylvania
Description
The range of maintenance
providers for Pennsylvania varied considerably depending on the division
responding to the survey. According to
the divisions, 10%-85% of maintenance was provided by the state DOT, while the
remainder of maintenance was subcontracted to private firms. Approximately 90%-100% of asset management
was also provided by the state DOT, while the remaining portions of asset
management was provided by private firms.
In addition, the state DOT provided 20%-100% of engineering and 29%-100%
of materials management depending on the division responding to the
survey. Although most of the remaining
service provisions were subcontracted to private firms, the county or other
state agency was subcontracted by one division for 50% of the engineering. Managed assets were valued at $32 to $350
million with additional managed inventories valued at a range between $100,000
and $9.2 million
Survey/Interview Findings
According to the divisions
in Pennsylvania, paving operations, asset maintenance, and information
technology and reporting were outsourced.
The most significant risks of outsourcing were labor issues, quality
control, timeliness and costs. Labor
agreements, government regulations, and current workload were the barriers with
the greatest impact on the outsourcing decision. However, outside experts were never involved
in the decision to outsource. Using all
possible benchmarks as the basis, the typical goals of cost reduction and
performance improvement were established.
Cost, business
qualifications and quality were most influential factors in the selection of a
provider. Although defining provider
expectations varied considerably depending on the project, expectations were
generally detailed as either measured performance standards with financial
penalties and incentives, or specifically documented standards with performance
rating and calibration. Policies and
procedures were always established by using existing policies. With performance measurement ranging from weekly
to annually, superior performance was rewarded by honorary rewards, monetary
rewards and future contract preference given to the provider. The following items were included on the
scorecards: administrative accuracy, budget accuracy, on-time performance,
product quality, responsiveness, and capacity and capability to perform
work. The most common points of friction
involved labor union issues, cost, timeliness, departmental policies and
defining the scope of the project.
The divisions indicated that
the following information was necessary to begin the outsourcing project:
·
Information on what the desired final product would be.
·
The who, what, where, when, and how of the project.
·
Cost comparisons and suggested contract prices for outsourcing.
·
In-house capacity and ability.
In addition, one division
noted that it was essential to have qualified people who understand the state
system.
Access to information
improved as a result of outsourcing about 50% of the time. In addition, the quality of results achieved
by outsourcing were always either equivalent to or higher than work performed
by the state. Finally, the divisions in
Pennsylvania suggested that the following areas should be outsourced by state
DOTs:
·
New construction, maintenance surface improvements, and
interstate/limited access signs.
·
Tree removal, herbicide spraying, and mechanical brush cutting.
·
Snow removal, paving, and guide rail.
·
Paving, roadside maintenance, and equipment-painting services.
·
Surface treatment operations, highway lighting maintenance, and line
painting.
·
Paving, roadside maintenance, and equipment-painting services.
·
Paving and guide rail improvements.
·
Those areas lacking expertise, where labor agreements make use
comparison and in a make versus buy process.
·
Construction inspection, some design, and building maintenance.
·
Where needs exceed current abilities to do in-house and major
construction projects.
Vermont
Description
The state DOT in Vermont
provided 50% of engineering, 75% of materials management, 85% of maintenance,
and all asset management services. The
remainder of all services were subcontracted to private firms. Managed assets were valued at $17.7 million
with an additional $220.6 million in other managed inventory.
Survey/Interview Findings
The division in Vermont that
responded to the survey indicated that no functions were outsourced, which may
be a function of concerns over the risks of quality control, cost control and
outsourcing too much. Outside experts
were not involved in consideration of outsourcing. In addition, the division indicated that
quality constraints, control of output and current workload were the most
significant barriers impacting the decision to outsource. The division did indicate that the most
common goal for outsourcing would be cost reduction, which was based on a
variety of benchmarks.
Financial stability,
business qualifications, information technology and quality were the most
influential factors in the selection of providers in the past. Provider expectations were detailed through
an open working relationship with the end deliverable defined by the budget and
time. Policies and procedures were
established primarily by using existing policies. With performance measured annually, superior
performance in the past was rewarded with honorary awards and future contract
preference given to the provider. The
following items were included on the scorecard: administrative accuracy, budget
accuracy, on-time performance, product quality, responsiveness, and capacity
and capability to perform work. The most
common points of friction were centered on realistic scheduling and cost
containment.
The division indicated that
work load projections, a list of qualified and available consultants, in-house
work projection, and funding projections would be necessary to begin an
outsourcing project. However, the survey
respondent could not provide an indication of whether information improved from
outsourcing since there were no services being outsourced by the division. The division did indicate that the quality of
the results achieved from previous outsourcing had been equivalent to work
performed by the state. Finally, the
division suggested that state DOTs should only outsource engineering services.
Wisconsin
Description
The Wisconsin state DOT
provides 20% of maintenance, 50% of engineering, 90% of asset management, and
100% of materials management services.
The county or other state agency provides 70% of maintenance, while all
other services are subcontracted to private firms.
Survey/Interview Findings
The division in Wisconsin
that responded to the survey indicated that asset maintenance and information
technology were outsourced. The most
significant risks of outsourcing were contract performance, the small number of
vendors to choose from and the higher costs than in-house expertise. Government regulations, labor agreements and
current workload were the barriers with the greatest impact on the outsourcing
decision. In addition, outside experts
were involved in the decision to outsource.
Using the benchmarks of previous contract history within the state DOT
framework and goals established by regulation as the basis, the typical goals
of ease in hiring contractors, performance improvement and cost reduction were
established.
The division indicated that
the following factors were most influential in the selection of a provider:
business qualifications, physical equipment and capability, cost and previous
experience with the provider. Provider
expectations, which were defined in a
range of days to months depending on the size of the project, were detailed
through an open working relationship with the end deliverable defined by the
budget and time. Policies and procedures
were established primarily by using existing policies. With performance measured weekly, superior
performance was rewarded by future contract preference given to the
provider. The following items were
included on the scorecard: budget accuracy, on-time performance, product
quality, and capacity and capability to perform work. The most common points of friction occurred
during the vendor selection process and differences of opinion in quality
performance.
The division also indicated
that information on the size of the project and the time for completion was
necessary to begin the outsourcing process.
In addition, access to information improved as a result of outsourcing,
and the quality of results achieved by outsourcing were equivalent to work
performed by the state. Finally, the
division in Wisconsin indicated that the following areas should be outsourced
by state DOTs: lawn mowing and snow plowing for DOT buildings, janitorial
services, and any area DOT lacks on-board expertise.
Evaluation
of Survey Findings
This section evaluates the
survey responses for the three groups taking part in this project. The evaluation provides a series of summary
tables for the manufacturing, 3PL, and state department of transportation
divisions. The complete survey results
are provided in the appendices.
Outsourcing challenges
facing the public sector have similarities to private sector challenges. The
listing of similarities between public and private characteristics and
processes provides a basis of exchange that centers on a cooperative exploration
of ideas and principles. These common
challenges also indicate, based on the experiences of the private sector, the
only way to ensure that an organization will achieve the desired results is
through a management tool – often called a scorecard. The scorecard is put in place before the
services are delivered and serves as the objective benchmark for performance
measurement to which both organizations commit.
By evaluating the common challenges and objective measures between the
private and public sectors, it is possible to establish a series of outsourcing
criteria needed in the outsourcing scorecard.
n Establishment
of Goals and Objectives
The surveys that were sent
to the department of transportation divisions began with the basic question,
“What do you outsource?” Of the 28
transportation division respondents answering this question, 13 indicated that
the division did not currently outsource and 15 indicated various levels of
outsourcing experience. Thus, 15
departments of transportation divisions, 5 manufacturing companies, and 2 third
party service provider respondents are comparable regarding outsourced
services. As provided in Table 1, the
most common outsourced and provided services (as is the case for the 3PLs) are
information technology, asset maintenance, material distribution, warehousing,
and fleet management.
|
Table
1: Outsourced Services |
|||
|
|
DOT |
Manufacturers |
3PLs |
|
Information
Technology |
9 |
3 |
2 |
|
Asset
Maintenance |
5 |
1 |
1 |
|
Material
Distribution |
3 |
4 |
2 |
|
Warehousing |
2 |
2 |
1 |
|
Fleet
Management |
1 |
2 |
1 |
|
|
N = 15 |
N=5 |
N=2 |
Since 13 of the
transportation division respondents indicated no participation in outsourcing,
all transportation division respondents were asked about the characteristics
and processes that allowed for or impeded outsourcing. The first question asked the transportation
division respondents about the barriers to outsourcing. The barriers to outsourcing are an important
aspect for the development of an outsourcing decision making scorecard. These barriers provide insight into the institutional
setting in which the outsourcing is or would be occurring. To understand these barriers, the
transportation division respondents were asked to rank, on a scale of 1 (low)
to 5 (high), the barriers that impacted their ability to outsource. As provided in Table 2, the results indicate
that the primary barriers to outsourcing are labor agreements followed by
government regulations. These are
important institutional barriers that seem to impede or influence outsourcing
decisions. This finding differs from the
manufacturers in which only one of the manufacturers indicated that internal
organizational issues are barriers to outsourcing.
|
Table
2: Barriers – Department of Transportation Divisions |
||
|
|
Mean Score |
N |
|
Labor Agreements |
3.29 |
28 |
|
Government
Regulations |
2.86 |
28 |
|
Current
Workload |
2.85 |
27 |
|
Project
Size/Scope |
2.63 |
27 |
|
Quality
Constraints |
2.54 |
28 |
|
Control
of Output |
2.48 |
|