The Swedish Agency for Public Management

To do or to buy? Outsourcing of state's core activities (On the public sector)

The outsourcing of public sector activities is currently worth very large sums of money. The Swedish Competition Authority estimates that public sector procurement amounted to around SEK 600 billion in 2012, part of which is made up of the state's core activities. A large proportion of Sweden's public services are now delivered by private sector providers.

This study came about due to the Swedish Agency for Public Management noting the lack of a comprehensive analysis of the outsourcing of the state's core activities. We would like this study to contribute towards reducing this knowledge gap. The study is based on survey data, interviews with government agencies, and studies of research reports, evaluations, reviews and other written materials.

What does the research say about outsourcing?

The research paints no clear-cut picture of the results of outsourcing. While it is true that the main impression one gets is that outsourcing often leads to reduced costs, the picture is more divided when it comes to the quality of outsourced activities.

The results of outsourcing are closely linked to the type of activities that are outsourced. To put it simply, it can be said that the more complex a service is, the harder it is to successfully outsource. The market is thought to be best suited to services which are simple and easy to specify and measure.

One problem highlighted in the research and the reviews is the risk of there being insufficient competition in the market for the service being procured. In Sweden, the operation and maintenance of roads and railways are areas in which the market has few actors and where there tends to be insufficient competition as a result. Another danger of outsourcing of core activities is that the expertise of the agency doing the outsourcing is depleted over time. This is especially problematic for agencies that have completely wound up their own activities in the outsourced service.

The efficiency gains outsourcing can result in are also dependent on the initial circumstances. Agencies that have previously worked actively to improve efficiency probably have less to gain from outsourcing.

Why do agencies outsource?

Sometimes there is no other choice

Our study shows that the decision to outsource is not always made voluntarily by the agency involved. The Swedish Public Employment Service is one agency that has not really had a choice for some of its activities. The Swedish Government has clearly stated that some of the agency's activities have to be procured from private entrepreneurs and that this is to be done in a system that incorporates freedom of choice. For the service of providing establishment pilots, the legislation also compels the Swedish Public Employment Service to outsource. Another example of the Government giving a clear signal is the Swedish Agency for Growth Policy Analysis (Growth Analysis). The ordinance with instruction for Growth Analysis states that the agency should procure evaluations and analyses from other actors.

However, the Government's intentions in this respect are only this clearly formulated in exceptional cases. It is more common for agencies to given such circumstances under which to operate that outsourcing certain core activities almost becomes a necessity. A small agency with a relatively small administrative appropriation and an extensive role, such as Transport Analysis or Growth Analysis, in practice, have limited chances of accomplishing their assignments using only their own staff. The same is also true for larger agencies that receive a large number of government assignments, like the National Board of Health and Welfare and the National Agency for Education. 

Government assignments are often specific and time limited. Both these factors contribute to making it better for the individual agency to procure temporary expertise than to hire a person with specific expertise to carry out the assignment; someone whose specialist expertise may no longer be required once the assignment is over.

When the agencies can choose: save money and acquire knowledge

Our study shows that agencies normally choose to outsource core activities for reasons of efficiency or financial savings. This is especially clear when larger volumes of services are procured. Construction and facilities services contracts are examples of this.

Another important motivation for outsourcing is gaining access to new knowledge and new ideas – knowledge which the agencies would otherwise be unable to keep internally. Here the main aim is the acquisition of knowledge, not saving money. At the same time agencies are aware, and in some cases worried, that extensive outsourcing of expert knowledge may lead to their internal expertise being undermined.

In some cases, outsourcing is not used primarily to gain access to new knowledge, rather it is a way to manage temporary peaks in activity. An agency may end up in a situation where, due to time or resource constraints, it is unable to carry out a specific activities using its own staff.

Outsourcing to a system of choice has its own specific prerequisites

One prerequisite of a functional system of choice is that those using the system's services are able to make rational choices. To make this possible, they must be given information about the various alternatives they can choose between and must also be capable of taking in this information and using it to weigh the pros and cons of the various alternatives against one another. Factors determining whether someone is capable of making well-informed choices in such a system include social resources and the complexity of the service in question.

The Swedish Public Employment Service provides a number of services within the scope of systems of choice. One of the Government's aims when introducing such systems in this agency was to offer a greater and more varied range of employment services by giving job seekers access to a larger number of actors. Something which in turn would lead to better service and improved matching for job seekers. The system of choice of the Swedish Public Employment Service has also come to be characterised by a very large number of actors. The large number of actors is a consequence of the low cost of entering the market. Establishment in this market required no major investments and there are no specific educational requirements. One consequence of the large number of actors is that it is hard for people to make well-informed choice.

To make a well-informed choice the person making that choice should therefore be capable of acquiring information, understanding it, and understanding the aim of the service. The prerequisites for this are poor in the system of choice of the Swedish Public Employment Service. Taking establishment pilots as an example, it is clear that those who will be choosing in this system have difficulty making a well-informed choice. The difficulties are partly due to the fact that someone who has recently arrived in Sweden cannot be expected to have any prior knowledge of what the service entails.

If a service is opened up to a large number of actors without specific requirements regarding equipment or staffing, and if the users of the service have difficulty making well-informed choices between these actors, the mechanism in the system of choice that will eliminate lower-quality actors will not function properly. If the suppliers note that high-quality activities do not lead to more participants, the interest in maintaining a high quality can be expected to wane.

Consequences for the state

A changed state

A significant proportion of the state's commitments are now delivered by private sector providers. The state does less, but controls more. However, in a country where market-based competition is fundamental to a flourishing economy the state still has a large and important role. The state creates a draws up a number of laws, sets up new agencies, modifies the existing agencies' assignments and disseminates information through its agencies, etc. But the state does this partly from a different perspective than before, namely that of promoting competition. For example, we now have new and improved competition legislation, a public procurement act and an act concerning systems of choice. Furthermore, agencies such as the Swedish Competition Authority, the Market Court and Sweden's Financial Supervisory Authority have been given a new, stronger role.

When so many of the state's activities are procured, this affects not just the state, but also the private sector providers. By becoming a provider of public sector activities, companies will be "drawn into" the state. The demands placed on public sector activities are also increasingly being placed on the private providers. The state's regulation and supervision of private sector providers of core public sector activities has been tightened up. We can also note that there are demands for further tightening and for it to become more like the regulation that applies to public sector activities.

Private sector providers of public sector activities also have to relate themselves to the procurement requirements resulting from the procurement legislation. We can therefore expect that companies selling a lot of activities to the public sector will also be affected internally by this relationship and both consciously and unconsciously adapt to the requirements and requests made by public sector procurers.

The role of the civil servant and the fundamental values of the state

The role of the civil servant is also affected by outsourcing. A civil servant employed by the state is primarily active in their professional capacity. They are mainly hired based on their education and knowledge. At the same time, by working for the state, the state civil servant is socialised into a special set of values which differ from those their colleagues in the private sector come up against.

The public sector's fundamental values are based on the civil servant's role of serving the population. Private companies and their employees are of crucial importance to our prosperity, but their fundamental values are not based on democracy, the rule of law and serving the population. The actions of a company and its employees are founded on profit, being businesslike and competitiveness. Privately employed officials who deliver services for which central government agencies are responsible can be said to be working in the state's name, but cannot be expected to be socialised into the public sector's fundamental values.

Issues to take a position on

Our study has shown that the decision to outsource core activities can have consequences which are neither intended nor obvious. Outsourcing the state's core activities is something which requires reflection. We have therefore chosen to formulate the study's conclusions in the form of five questions which those who consider outsourcing their core activities should think about. These areas are:

  1. What is to be outsourced and why?
  2. Is there a risk of other values being jeopardised if the outsourcing is mainly planned for financial reasons?
  3. What does outsourcing mean internally for the agency?
  4. What demands does the outsourcing place on governance?
  5. How do we safeguard our own expertise when outsourcing?

More studies are needed

One observation in our study is that there are large gaps in our knowledge of outsourcing and its consequences for public administration. The knowledge gap is especially notable regarding outsourcing of the state's core activities.

In this study we have made a number of observations regarding outsourcing that should be of interest to public administration. Observations which we believe are worthy of closer study. Areas which we believe need more knowledge are:

  • the connection between outsourcing and governance,
  • the scope and consequences of the governance of assignments, and
  • the overall consequences of outsourcing for the state, the enterprise sector and the role of the civil servant.