Privatization and outsourcing

Several of the comments on my post about the DMV recommend privatization (or outsourcing) DMV functions, as though those described a binary choice.  They do not.  Every production process of a government good or service is a chain of steps (actually, a tree-like set of converging chains) beginning in the private sector (labor is always a set of private sector enterprises) and ending in the public.  Usually each chain has one link where intermediate goods cross the public-private boundary, and privatization only means moving that boundary closer to the end product. It’s much more continuous than binary; a government armory can buy rifles ready to shoot from a private firm, buy parts to finish and assemble,  buy logs and steel to mill and forge and machine, or even buy an iron ore deposit and a coal mine  and really make guns “from scratch”.  DMV office buildings and furniture are universally privatized (no DMV has carpenters or cabinetmakers on payroll) training its employees can be partly (K-12 education and college) or almost completely outsourced (on-the-job training contracted out to consultants rather than internal).  It hardly matters to the DMV customer experience whether the license plates are made in prison or Joe’s Metal Stamping shop, or whether the prison is managed by Wackenhut or the Dept. of Corrections.

Simply moving the contract boundary toward the product end buys nothing as a general rule, and can be quite dysfunctional; the trick is to find the place where it’s most useful to have control exerted through a contract rather than through internal administrative procedures, and the right place is different not only for different products but also for different governments and agencies, even different DMV’s.  The contract relationship has distinctive features that bear on this decision. For example, it forces the procuring agency to set down in writing exactly what is being bought and to examine the delivery for compliance, and it forces a cost measure difficult to assess at internal boundaries.  Sometimes it allows the chain to be easily disconnected from a supplier source and connected to another, and it always prevents influence on upstream agents through informal guidance, pay adjustments, and firing. There’s more; it’s complicated.  Bob Leone, Marc Zegans and I explained this twenty years ago here .

“Outsource!” as a management principle for government is vague in meaning and far from a universal prescription.  Nor is this only about simple measures of efficiency;  I was surprised at the one commenter’s approval of first-class DMV service sold for a premium price. Maybe, but this seems worth a little thought.  Should neighborhood policing be auctioned off as well?  A jury trial only if the defendant is willing to pay the jurors a market-clearing daily rate?  Written comments on student papers beyond a letter grade provided (by me) only for an extra tuition fee?  Office hours in groups on seats in the gym, $25; one-to-one in my office with coffee, $250?  I love markets, but DMV’s functions are coercive and regulatory, and they represent the dignity of the state and the State; I’m not sure I want them sold at a Walmart counter, even with no waiting and a big smile.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

9 thoughts on “Privatization and outsourcing”

  1. Here in Az we have privately run, but DMV approved, satellite offices ( as well as on-line services. One consequence of these two conveniences is a huge decrease in the number of people visiting the closest "big box" DMV; now there's never a long wait and the staff is friendlier than ever. Fewer screaming children, too.

    I don't know how well outsourced satellite offices would work in a denser area but it seems worth a try.

  2. Nice analysis.

    The two knee-jerk responses to poor DMVs are "close all of them and let people drive freely everywhere" which as several people have noted is not plausible and "If taxes were higher this wouldn't happen" which is also completely untrue. DMVs have a monopoly privelige, any organization with such a privilege will tend to abuse it, public or private. But it is worse in the public sector because while you can refuse to buy the private sector products of a monopoly, the law forces you to buy the products of a public sector monopoly, including taking some of your income by force to support such services whether you like it or not.

    It is telling that AAA sells as a benefit not having to deal with the DMV, i.e., something you have already paid for once with your taxes. Ditto the commenter on my DMV post who paid a couple hundred bucks for a private businessman to do his smog check and stand in lines. This is what you see all over the middle east — public sector services are so bad that better off people pay extra money not to deal with them, on top of the taxes they pay to make them exist. And the poor get crap public service because they can't pay doubel freight, Michael gives great examples of how bad this is in his post.

    The reason many DMVs give bad customer service is no different than the reason why many felony probationers in Hawaii keep using crystal methamphetamine: There are no consistent consequences for doing otherwise. In the public sector we can create some consequences by (1) creating a privately contracted competitor, or, (2) (What I have spent a lot of time doing) designing public sector reward mechanisms that create private sector like incentives. This has been transformative for the VA health care system — hospitals and doctors that give more evidence based care and save more lives get extra money, just like they would in the private sector. The DMV could withold 5% of its annual budget (yes, it often takes only 5% to change the culture of a public sector agency) as a performance award fund and have either fake customers or a random sample of real customers report on customer service at local DMVs and then pay out the % to the places that gave good service, advertise who won each year, have the governor visit the best office for a photo op with the staff etc. It takes some creativity, and even moreso it takes a move away from reflexive hostility to markets and defense of the public sector incompetence.

  3. In the Feds, the theory is that you don't outsource 'essential government services', which are essentially decision-making. So a contract judge can't sentence you to hang, but a Wackenhut guy can be told to bring you to court in chains. Or, closer to my experience, in my office the decisions on approvals are made by Feds, the record-keeping is done by contract employees ('please bring from the warehouse the file on this decision we made in 1997, I need to compare it to the decision we are making now for consistency'). Seems reasonable.

    Devil is in the details, though: you could make an argument against private DMV satellites, that low-commitment guys who knew they were unlikely to have the job in three years would sell licenses to people who could not pass the tests, but that people with a stake in the system ('bloated public pensions!) should have an incentive not to. Then someone would throw the example of public-employee Illinois DMV truck license issuers in your face. We make pharmacists go through a long and expensive training so they can make $95000 a year counting pills behind a counter at the back of the grocery store, and we say it is because we need them to be alert for drug interactions but in fact it is largely so they will fear losing something valuable if they sell oxycontin out the back door.

  4. you could make an argument against private DMV satellites, that low-commitment guys who knew they were unlikely to have the job in three years would sell licenses to people who could not pass the tests.

    Note that in VA, the DMV satellites can't issue driver's licenses. They can change addresses, handle anything related to vehicles, and so forth–but to get a driver's license, you have to deal with the DMV.

    And just because; Dec 23, I went into the local DMV (Richmond–a big-city DMV) about 30 minutes before closing to surrender a registration (I'd wrecked a vehicle.) The security guard was expediting, which I sincerely doubt was part of his formal job–showing people who to talk to, which line was for what services, etc. I'd say that is a shining example of a desirable office culture of actually being helpful.

  5. I have gotten DL's in Hawaii, California, Oregon, Washington, Colorado, Massachusetts, Minnesota, Wisconsin, and Illinois. That is almost 20% of the country. California was the worst DMVby a landslide. Colorado and Minnesota where the best. The others were all within the perfectly acceptable range of service from any large entity. All the states but California and Illinois provided a better experience then buying a new cell battery at Best Buy or dealing with airline customer service. Large organizations, private or public, have a very difficult time providing the level of customer service that a small organization can. Small organization have Avery difficult time matching the priceoflarge organizations. Public/private has nothing to do with it since the profit motive in the average worker is (as opposed to management) the same in either case – neither the private admin worker nor the public admin worker has much incentive to do their job beyond it's basic functions. That best buy checker is going to make their $8 an hour checking out 10 people an hour or 20, what is the difference them? Same at the DMV .

  6. I was surprised at the one commenter’s approval of first-class DMV service sold for a premium price. Maybe, but this seems worth a little thought.

    Michael, we already have that aplenty.

    Yes, making up examples to show it's silliness is illustrative, but here is the reality on the ground:

    If you have lots of money you can pay a fine, not admit to any guilt, and stay out of jail free:

    Regulators have fined Goldman Sachs $450,000 and censured the firm's market-making division for violating rules governing short sales in the wake of Lehman Brothers' collapse in 2008. A Goldman spokesman said the violations resulted from a processing error, and had no financial effect on clients.

    There are tons and tons of examples of this.

    Having money already moves you to the front of the line.

    And keeps you out of the blackest jails.

    As an aside, I get a kick out of the very serious economic people on the internet waxing profound about regulatory capture. Their working definitions are way too narrow. Because in fact, too much wealth captures every advantage for its holders. Indeed, too much money in one place is like a black hole in space: It captures everything and creates nothing.

    It doesn't matter what economic system mankind operates under: money coalesces like matter under gravity. That's it's prime Newtonian property. And so the main problem for every economy is always (if it wishes to survive): How do we redistribute our black money holes and create fecund new solar systems? In the America of adults (1940s-50s), we did it by taxing the rich. A failure to do this again, will lead to permanent dark universe of few stars and fewer planetary systems. And that's because ultimately hyper-condensed wealth is economic entropy…

  7. True privatization (as opposed to mere contracting) means the government does not pay for anything. It's compatible though with a "just-give-them-money" tax+transfer system in which the recipients of redistribution themselves decide which private goods to consume. In the context of the DMV, all roads could be privately owned and the owners would decide the criteria for driving on them.

  8. "hospitals and doctors that give more evidence based care and save more lives get extra money, just like they would in the private sector"

    Do we have strong evidence that this is true in the private sector? My impression had been that market power was much more important…

  9. re Karl's remarks, I only go to the DMV when absolutely necessary. I appreciate the online access for most interactions with them. It's highly efficient and effective.

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