Government Contracting with Nonprofit Organizations:
Challenges Facing Public Managers
Suzanne El Gamal PA 700
Professor Eric Zeemering April 19, 2010
Introduction The continuing scarcity of governmental resources has driven administrators and policy makers to seek creative solutions for controlling governmental growth and expenditures. Privatization of public services has emerged as a popular mechanism for improving operational efficiency. One frequently cited definition of privatization in the literature is “changing from an arrangement with high government involvement to one with less” (Van Slyke, 2002, p. 490). The privatization concept is based on two premises, namely competition and “load‐ shedding” (Smith and Lipsky, 1993, p. 188). Competition gives rise to price cuts, improved quality of services, and ultimately increased efficiency. Load shedding refers to outsourcing services thereby curbing governmental growth and expenditure in both program and personnel costs.
Privatization is achieved by government contracts with private sector agencies for service delivery. Contracting entails a formal agreement between a government and a nongovernmental agency for goods and services. It requires government to bear an administrative and managerial responsibility with the private sector agency. According to Brown, Potoski, and Van Slyke (2006) contract management has three key stages. The first stage involves the decision of whether to contract out a service as opposed to
providing it directly by the government. If the decision favors a contract the selection of the vendor constitutes the second stage, followed by the third stage of devising the tools for monitoring contract implementation (p. 324). All three stages require trained public managers, who possess “policy expertise, negotiation, bargaining, mediation skills,
skills to manage programs with third parties in a complex political environment” (Van Slyke, 2003, p. 296-297). This paper will present a brief historical perspective on government contracts with nonprofit organizations followed by an exploration of the challenges facing public managers of these contracts. It will conclude with a brief discussion of the implications of government contract management for public administration and the public.
Historical Perspective
Nonprofit service organizations have always sought to provide solutions for problems as they arose in society. They relied on private funds, charitable contributions and voluntary work by private citizens. According to Smith and Lipsky (1993), nonprofit organizations provided services from “cradle-to-grave” (p. 3). Because of their expertise in specialized service areas and their generally positive reputation among the public, nonprofit organizations have been attractive candidates for government contracts. During the 1960s and 1970s the federal government increased funding for social welfare services including contracts with nonprofit organizations (Smith, 2005, p. 372).
The first purchase-of-service contracting (POSC) arrangement between
government and nonprofit organizations is marked by the 1967 amendment to the Social Security Act. At the time the Bureau of the Budget, which is now called the Office of Management and Budget, published Circular A-76 with guidelines for deciding the appropriateness of contracting (Van Slyke, 2002, p. 492). In 1980 social welfare spending accounted for 65 percent of total government spending. Approximately 50 percent of state government human service expenditure was directed toward nonprofit organizations in the form of contracts (Smith, 2005, p. 373).
In 1981 in an effort to cut government spending, the Reagan administration decreased federal spending on social services by 20 percent. Interestingly, this savings of federal spending translated into an equal increase in state and local spending (Smith, 2005, p. 373). The Reagan administration marked the beginning of the “new federalism” policy of devolution, which is grounded in the premise that federally run programs are ineffective and expensive (Alexander, 1999, p. 57). Different categories of social services were consolidated into block grants to state and local governments. Consequently, social service administration was decentralized leaving the responsibility for service delivery resting with state and local governments. Smith and Lipsky (1993) point out that federal government funding used to be granted for service projects with few strings attached. State contracts, on the other hand, are negotiated for very specific services (p. 10). This transition has resulted in a significant shift in contract management needs and duties. Upon the recommendation of the 1983 Grace Commission, the Reagan administration revised Circular A-76 into a management improvement policy (Van Slyke, 2002, p. 492).
Ironically by the late 1980s and the 1990s federal funding for social services began to rise again. State and local governments tapped into Medicaid and Medicare funds and government contracts with nonprofit organizations continued to increase (Smith, 2005, p. 373). In the mean time government spending reform embraced the New Public Management movement, which idealizes competition-driven market efficiency. Thus the government set out to apply lessons from private sector practices to government contracts with nonprofit organizations (Alexander, 1999, p. 58).
To benefit from competition the government must behave as a smart buyer of services by carefully choosing the contractor from among competing service providers.
Public managers invite bids from nonprofit organizations providing the desired services. After selecting the most competitive bidder, managers are then charged with brokering, implementing, and monitoring government contracts. In the process they are expected to find the best market conditions without compromising the alignment of public values with institutional values. Additionally, contract managers may generally operate in a politically charged environment or may be obligated to develop contracts under
suboptimal conditions due to decisions by elected officials (Brown, Potoski, & Van Slyke 2006, p. 323). Given these pressures and constraints, public managers face challenges in the areas of competition development, public management capacity, and accountability. The following discussion will focus on these management challenges and identify suggested best practices for government contracts with nonprofit organizations. Management Challenges and Best Practices:
In the pre-contract phase, competition development hosts several challenges to public managers. The first challenge is the assumption of the presence of a market of service providers in the area in need of services. The reality is that for some services and for some counties only one service provider may be available (Van Slyke, 2002, p. 498). Not only are there fewer options for social service providers on the supply-side, but the government may also be the only bidder on the demand-side (Van Slyke, 2007, p. 161). Hence, the premise of a market competition may not exist at all. Yet, because of political pressures the manager may have to proceed to define a contract under these less than optimal conditions. In the absence of competition the manager risks loss of equity, justice, responsiveness, and public choice (Van Slyke, 2002, p. 502).
program for abused children fired one of its social workers when her sexual preference was revealed. The nonprofit organization justified its action by emphasizing its mission of spreading Christianity and Christian values among the children and families served. The nonprofit asserted that homosexual individuals are prohibited from employment in the program. The former employee along with several taxpayers filed suit against the nonprofit. The court dismissed the discrimination claim by stating that homosexuals were not protected from discrimination under Title VII. However, the taxpayers were allowed to continue their lawsuit, because the nonprofit unconstitutionally imposed religious practices on behalf of the state (Pedreira, et al., v. Kentucky Baptist Homes, No. 08-5538, 6th Cir. 2009). This is an example of unjust employment practices where the nonprofit organization allowed its beliefs to prevail over its obligations to the government contract. The conditions of the contract between the Kentucky Baptist Homes and the government are not known. However, this case demonstrates the type of problems, which can arise from public managers contracting out with a social service provider in the absence of competition in certain geographical regions of the country.
In the competition development phase, managers face yet another challenge. The formulation of the request for proposals (RFP) is critical because it requires clearly articulated goals, objectives, strategies, and outcome measures. Many of these criteria are hard to define and to quantify for complex social services such as refugee services, drug rehabilitation, child and elder abuse, or AIDS patient care (Van Slyke, 2002, p. 489). Public contractors, therefore, need to become very familiar with the service needs of the particular client community. According to Romzek & Johnston (2002), successful implementation of contracts requires public manager foresight and planning (p. 435).
Another management challenge in the competitive process is the actual bidding process. Contractors may significantly underbid to secure the contract. A manager’s lack of knowledge of the service area may focus on the lowest transaction cost as the
prevailing criterion for the bid. But once actually charged with the services, the vendor may not have the capacity to meet the demand. After observing five cases of nonprofit contracts with the state of Kansas, Romzek and Johnston (2002) noted that all five
organizations were not prepared for the financial and organizational costs associated with their contracts. The excess costs were due to assumed risk where client case treatment costs exceeded the state allotted capitation costs (p. 437). A communicative and well-informed public manager can avoid this outcome by informing nonprofits of the service population needs, the program accountability requirements, and the costs associated with them before finalizing the contract.
Clearly, advance planning and research are predictive ingredients for a successful contract. This pre-contract preparation is time-consuming and requires increased
management capacity. At the same time government is downsizing, decreasing staffing and creating management capacity shortages. Interviews of New York state public managers reveal the strong preference of the state to contract out services over hiring internal staff. All county managers interviewed indicated that in budgeting matters contracting is much less questioned than any request for new county employees. Yet nearly 80 percent of public managers interviewed expressed the need for more
management capacity in every phase of the contracting process. Similarly 75 percent of nonprofit executive directors reported a need for more management capacity for program oversight, evaluation, and guidance (Van Slyke, 2003, p. 305).
Management capacity is defined by Brown and Potosky (2003) in terms of three contracting areas, namely feasibility assessment, implementation, and evaluation. Each of these areas requires specialized expertise. The feasibility assessment capacity may
require market analysts and legislative study groups to determine the appropriateness of contracting a service as opposed to being directly provided by the government. The Implementation capacity requires knowledge about the bidding process, inlcuding contract negotiators and legal advisors. The evaluation capacity entails performance measurements, requiring project auditors (p. 155). In the absence of management capacity, contracts are likely to be hastily awarded resulting in such consequences as “organizational disruption, financial crises, policy making on the fly, imprecise
performance expectations, and problematic procedures for accountability.” (Romzek and Johnston, 2002, p. 426)
Diminshed management capacity compromises the managers’s responsibility to the public. Under-staffed management teams are often unable to adequately monitor contractor performance, thus compromising accountability for both equitable service and delivery use of public funds. Van Slyke (2003) recorded a New York manager’s
frustration of having a staff of twelve people oversee five hundread providers. As a manager in a politically charged environment, she explains that policy makers seldom inquire about monitoring parameters of a given project. Therefore, due to the limited staffing capacity, performance monitoring receives lowest priority (p. 306). Studies performed by the General Accounting Office confirmed that state and local governments have ”little experience in developing contracts that specify program results in sufficinet detail to effectively hold contractors accountable” (Van Slyke, 2003, p. 306). In response
to these findings, legislators increase reporting requirements from nonprofit organizations. However, as requirements increase so do the administrative costs associated with them.
Another factor compromising accountability is the difficulty in measurement of goals and outcomes of the complex social services provided by nonprofit organizations. This factor can be compounded by public managers’ lack of access to program results, either because of the contractor’s further contracting work to a third party or because of the manager’s lack of technical knowledge to interpret performance reports. In either case the government becomes vulrnable to contractor opportunism (Van Slyke, 2003, p. 306). One such example is the practice of “client creaming,” where the expert contractor provides services to the most treatable clients only. Consequently, not all eligible clients are able to receive treatment and the contractor saves unused contract money for other programs outside the government contract (Van Slyke, 2002, p. 503). With adequately researched monitoring criteria and consistant public management involvement such contractor abuses can be avoided.
Lastly being government employees, managers are accountable to the public. On the other hand, while nonprofit employees deliver services directly to the public, they are not bound to the same accountability constraints of government employees (Van Slyke, 2002, p. 502). Aware of this challenge, experienced managers have established and required formal systems to monitor citizens’ complaints. By receiving feedback from the recipients of services, managers can more accurately assess the contractor’s performance. Managers have also devised citizen surveys to be used as a tool for gauging public
contract implementation (Brown, Potoski, &Van Slyke, 2006, p. 328). Implications for Public Administration and the Public
The contracting process has impacted the practice of public administration by giving rise to a new form of governance. Van Slyke (2007) describes this transformation as governance by contract rather then governance by authority (p. 158). In contrast to the traditional managerial hierarchy for direct services contracting requires a broader
nonhierarchical form of management for indirect services. Because both federal and local governments continue to provide direct services, the new public administration must accommodate both the direct service and the indirect service systems (Kettl, 2002, as cited in Shafritz & Hyde, 2008, p. 579). These dual systems have given rise to
intergovernmental relations, which have added politics back into public administration (Kettl, 2002, as cited in Shafritz & Hyde, 2008, p. 581).
The government’s loss of technical expertise consequent to downsizing has increased the influence of specialized private sector service providers on performance criteria definition and policy making. This political influence of contracted nonprofits raises the questions of democratic accountability and governmental objectivity. It appears to privilege some political voices over others (Kettl, 2002, as cited in Shafritz & Hyde, 2008, p. 583). On the other hand, nonprofits tend to serve the disadvantaged in the community. Their access to government may strengthen the democratic system by allowing charities to tell the government about the public’s needs as they see them (Smucker, 2005, p. 230).
Conclusion
outsourcing of services, “contracting is and will continue to be a major task facing public managers (Brown, Potoski, &Van Slyke, 2006, p. 323).” Kettl (2002) states, Americans have always favored more government services without paying more taxes for them. Consequently the government continues to seek the most efficient ways to meet this increasing demand for more sophisticated services. The process requires a flexible public administration system to meet this constant challenge for the lowest price (as cited in Shafritz & Hyde, 2008, p. 578). The impelementation of new public management requires administrators to maintain a disciplined balance between the practices of the private sector and their unique obligations as government agents. Kettl (2002) refers to this balance as the transformation of governance (as cited in Shafritz & Hyde, 2008, p. 578). He perceives it as inevitable in the face of such complex issues as terrorism, new health threats, advances in technology, and record speed internet communication. Kettl (2002) points out that these challenges can overwhelm any bureaucracy, especially when the growth of the bureaucracy is highly unpopular (as cited in Shafritz & Hyde, 2008, p. 581). Hence, government must rely on nongovernmental partners to acquire the necessary tools to address its daunting tasks. Yet, the government must preserve its sovereignty and legitimacy to retain its legal position. It must strive to not allow the blurring of its
boundaries to interfere with its role in protecting public interest (Kettl, 2002, as cited in Shafritz & Hyde, 2008, p. 582). The role of public managers in this evolving state of transformation is critical to the success of policy implementation. Careful competition development among service providers, skilled contract negotiation based on
well-researched paramaters, and well staffed management capacity are all key ingredients for successful contract management.
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