Adversarial and cooperative models in contracting for public services
PA 762 ORGANIZATION THEORY
Instructor: Dr. Branda Nowell
GOVERNMENT TO GOVERNANCE:
ADVERSARIAL & COOPERATIVE MODELS
IN CONTRACTING FOR PUBLIC SERVICES
North Carolina State University
Raleigh, NC 27695
Date of Submission: April 23, 2008
Date of Presentation: May 5, 2008
ABSTRACT _____________________________________________________ 2
I. Introduction ____________________________________________________ 3
II. Transition from Government to Governance __________________________ 3
III. Confounding Factors: creating or compounding uncertainty?_____________ 4
A. Economy, Efficiency and Effectiveness (3E) __________________________ 4
B. Does a Competitive Market Exist? __________________________________ 6
C. Is there a Market Regulator? _______________________________________ 9
D. Regulation of Contractors ________________________________________ 12
IV. Role of Environmental Uncertainty/Turbulence ______________________ 14
A. Government to Governance Model_________________________________ 19
B. Typology Matrix _______________________________________________ 21
C. Operationalizing the Independent Variables __________________________ 21
D. Applicability of Model __________________________________________ 23
VI. Directions for Future Research ___________________________________ 24
VII. REFERENCES_______________________________________________ 25
The extant literature on contracting for public services shows a clear dichotomy. On the one
hand, are ranged the apologists for contracting; on the other, are the detractors who however, have
provided only limited empirical evidence of the pitfalls of contracting, thus leaving an empirical
research gap between the perceived benefits and pitfalls of outsourcing. Much of this research gap is
attributable to the absence of uniform and accurate measures for the variables used in the study apart
from homogeneity of physical areas, target population, etc. Nor do such research designs and
findings permit of generalizability. Evidently there are complex issues and linkages involved in
transposing private sector principles into a governmental environment that, unless measured and
controlled uniformly and accurately, would continue to retard the credibility of research findings.
Therefore what are the major confounding factors adding to/creating environmental uncertainty that
impact contracting for public services? Does environmental uncertainty determine the structure
and/or the quality of a contract? This proposal addresses these research questions in the principal-
agent perspective and hypothesizes that the level of cooperation between the principal and the agent
is related to the level of environmental turbulence that, in turn, determines the nature and/or types of
contracts entered into between them. The proposal proposes a research design that would be flexible
of use at multiple levels of analysis and across different sets of programs/organizations using a
standard set of eight independent variables and their constituent control variables that dovetail into a
typology matrix of contracts. The matrix juxtaposes the level of cooperation with environmental
turbulence and categorizes contracts as falling into four distinct categories.
The transition from government to governance over the last two decades has witnessed
governments all over the world contracting out many essential services, particularly municipal and
human services, to contractors. However, not only has extensive literature been produced on this
subject but there is limited empirical evidence that points to the success or otherwise of outsourcing
in a context or set of contexts. Nor do such research designs and findings permit of generalizability.
Evidently there are complex issues and linkages involved in transposing private sector principles
into a governmental environment that, unless accounted for uniformly and accurately, would
continue to retard the credibility of research findings. Therefore what are the major confounding
factors adding to/creating environmental uncertainty that impact contracting for public services?
Does environmental uncertainty determine the structure and/or the quality of a contract? This
proposal addresses these research questions in the principal-agent perspective and hypothesizes that
the level of cooperation between the principal and the agent is related to the level of environmental
turbulence that, in turn, determines the nature and/or types of contracts entered into between them.
The proposal proposes a research design that would be flexible of use at multiple levels with a
standard set of eight independent variables and their constituent control variables that dovetail with a
typology matrix of contracts. The matrix juxtaposes the level of cooperation with environmental
turbulence and categorizes contracts as falling into four distinct categories.
II. Transition from Government to Governance
What does this transition entail? Gerry Stoker (18-19) puts forth five propositions.
Governance refers to a set of institutions and actors that are drawn from outside government.
Second, it identifies the blurring of boundaries and responsibilities for social and economic matters.
Third, it identifies the power dependence involved in the relationships between institutions involved
in collective actions. Fourth, it is about autonomous self-governing network of actors. Fifth, it
recognizes the capacity to get things done which does not rest on the power of government to
directly command or use its authority. These propositions are complementary and not exclusive.
However, Stoker also points out some dilemmas that these propositions carry. First, there is a
divorce between the complex reality of decision-making associated with governance and the
normative codes used to explain and justify government. Second, the blurring of responsibilities may
lead to scapegoating. Third, power dependence exacerbates the problem of unintended consequences
for government. Fourth, the emergence of self-governing networks raises issues of accountability.
Fifth, even where governments operate in a flexible way to steer collective action, governance
failure may occur (20-22). Contracting has come mainly in tandem with gradual downsizing in
public agencies and the injection of private sector principles of economy, efficiency and
effectiveness. At the same time the peculiar nature of such services has rendered public agencies
vulnerable to malpractices by contractors and raised serious doubts about the efficacy and
desirability of contracting as Stoker has pointed out. New practices evolved by public agencies have
added to such doubts. Evidently, there are confounding factors that complicate the principal-agent
relationship and add to/interact with environmental turbulence and obfuscates the real benefits/losses
III. Confounding Factors: creating or compounding uncertainty?
A. Economy, Efficiency and Effectiveness (3E)
Proponents of contracting argue that it is more cost-efficient and better stimulates innovation
than direct service delivery. On the other hand, direct service delivery has been found to promote
political accountability, stability, and equality of treatment (DeHoog 1984; Donahue 1989; Kettl
1993), although the relative strengths of direct versus contract service delivery appear to vary across
circumstances (Brown and Potoski, 2006; Morgan and England 1988; Sclar 2000). The popular
perception of contracting leading to 3E has been debunked by George Boyne. First, Boyne argues
that public choice theory does not imply that transferring responsibility for a publicly funded service
without competition enhances efficiency (475). Without curtailing the services, efficiency would be
tested by declining costs of providing the service. Second, contracting is a prerogative of
government and does not necessarily provide greater say for consumers. In fact, consumers may be
saddled with an efficient service they never asked for. Third, if savings are indeed generated by
contracting, municipal budgets should decline; since they don’t evidently the taxpayer reaps no
benefit of economy. Last, if such savings do not accrue to the governments, their spending
nonetheless on other services would continue to rise. For instance, Boyne reviews Berenyi &
Stevens and Kemper & Quigley and concludes that there is little difference to costs or efficiency,
regardless of population size where garbage removal was contracted out (Boyne, 477). Similarly, the
empirical literature is selective among geographical areas and favors cases where contracting proved
successful to the exclusion of other areas where it may not have proved economic and efficient.
Critiquing McGuire and vanCott, Boynes concludes that there is little difference between public and
private suppliers in the provision of school transport and that competition was associated with higher
costs (Boyne, 479)! Even where municipalities have contracted with counties for services, the
empirical literature does not show that economy moved in tandem with efficiency (Boyne, 478-80).
Boyne therefore rightly concludes that research designs suffer from major flaws. First, such
designs do not take into account local ideological preferences. Thus a traditional desire for small
government may lead to lower expenditure and higher contracting; not as a conscious 3E measure
(Boyne, 481). Second, the studies do not mainly control for scale effects. Population size may not
therefore be the cause of economy; rather the scale of operations of the provider may be of greater
import. Equally, it may not be fair to judge a contractor on the basis of its operations in a limited
locality when it operates over a much larger geographical area (Boyne, 481). Third, none of the
studies contain any direct measure of competition. It is probable that the contractor may replace the
state agency’s monopoly or a state agency may become more efficient by the mere threat of
contracting its services. Fourth, unusually small sample sizes are not representative of the ground
realities (Boyne, 475). Fifth, the geographic spread of the empirical studies is such that they do not
bring out the true economy of contracting such as Ahlbrandt (1973) who compares the actual cost of
a contracted service with the hypothetical cost of the same service had it been rendered by a public
agency (Boyne, 475). Is contracting therefore another ‘management fad’ and/or are the empirical
studies inspired by such ‘fads’ and seek to justify contracting? (Boyne, 482) It is apparent that the
design of the proposed research would have to control for all these factors in arriving at a make or
buy decision which is what this proposal attempts to arrive at.
On the other hand, Cohen (435) states that contracting should not be resorted to functions
that regulate or prohibit free movement of people as this a strict sovereign function. In fact he likens
private management of prisons as punishable for kidnapping! He says that contracting should not
also be resorted to for activities that have no obvious customer with the resources to provide a profit
to the organization that performs it, e.g. insurance. He eventually falls victim to stereotyping as he
states that if the goals are innovation and efficiency, then contracting with a private vendor may be
more desirable, because private employees operate with higher-powered, compensation-based, and
profit oriented incentives. If the goal is more government control over service provision, then
internal production may be preferred, because government employees’ motivations are typically
better aligned with the agency’s mission. That efficiency is not the necessary fallout of contracting is
shown by Boyne in his analysis of empirical articles where in 7 categories of services, four had
unclear improvement in efficiency; three provided lower quality of services, three had held service
quality constant while the improvement of two others remained unknown (Boyne, 479).
Notwithstanding Boyne’s telling remarks about the make or buy decision, services with
inherently lower transaction costs remain more favorable contracting targets, freeing resources to
lower costs or to purchase more service quality. On the other hand, services with higher transaction
costs pose greater contracting problems, consuming more resources and inhibiting a manager’s
ability to optimize competing values. The principal-agent problem seems to grow as do transaction
costs even when they can be minimized with state discharge of services.
Proposition: 3E is not necessarily achieved by contracting with private parties; neither does
contracting reduce transaction costs nor shifts the balance between the principal and agent in favor
of the principal.
B. Does a Competitive Market Exist?
Since public choice theory centers on market competition to drive down costs of contracting,
a central presumption is that a market exists. Effective markets provide managers with important
information about prices and service quality of vendors and facilitate disciplining vendors who fail
to meet contracts (Hart and Moore 1999; Niskanen 1971). In well-functioning markets, competition
for contracts can help overcome principal–agent problems. Strong and effective markets, however,
require some fairly strict conditions. They need large numbers of buyers and sellers, participants
need to be well informed about products and each others ’ preferences, and actors must be able to
enter and exit the market and exchange resources at low costs. If a perfect market does exist how
does it explain the emergence of contract monopolies?
Van Slyke addresses this issue effectively (297) and concludes that there is lack of
competition and diminished quality, bearing out Boyne’s findings supra. County managers who
were interviewed for this study cited environmental constraints, actions of nonprofit organizations,
networked relationships and government enacted barriers as the major causes for the lack of
competition. Downsizing has caused a lack of capacity on the part of public agencies to support and
sustain a competitive market that, in turn, has prevented the emergence of 3E alternatives for service
delivery. This issue has been dealt with at length subsequently in this proposal. Secondly, nonprofits
by virtue of their expertise (e.g. mental health) created niches and did not allow competition to grow.
Such steadfastness to a geographical area was sustained by the nonprofits by supporting social
service legislation and strong advocacy for these changes. In addition, the nonprofits erected entry
barriers such as accreditation that was, in turn, strengthened by legislation that mandated such
accreditation, and kept competitors away (Van Slyke, 303). Added to this was the pressure from
politicians on agency managers to contract with specific nonprofits. This has ensured that services
continue to be rendered even when and where they are not required, that perpetuates the life of these
nonprofits and drives out competition (Van Slyke, 303). Lastly, by contracting between themselves
to reduce the costs of contracting (dealt with subsequently in detail in this proposal) government
agencies have also severely limited competition (Van Slyke, 305).
Markets can fail because of high transaction costs, limited information, uncertainty about the
future, and the prospect that people or organizations will behave opportunistically in their
interactions (Coase 1937; Williamson 1981, 1991, 1996). Of particular importance are the varying
transaction costs inherent in different market and service arrangements. The type of vendor becomes
more relevant when contracting for high transaction cost services in thin markets — for example,
when a small government needs to deliver a service that requires large asset specific investments
beyond what it can afford. Again, the literature suggests that governments already understand this;
they more frequently choose nonprofit and other governments when contracting for high transaction
cost services and in thin markets (Brown and Potoski 2003b). Yet even contracting with vendors that
purportedly share the same goals is not without risks. Van Slyke (2003), for example, finds that
governments often establish long-term contract relationships with nonprofits for social services, but
then they neglect oversight and monitoring responsibilities. Nonprofits, increasingly reliant on
public sector contracts, may begin to behave like conventional monopolists to maintain their
resource streams. Perhaps more troubling are circumstances in which a government contracts in a
thin market out of ideological, political, or nefarious motives and then neglects contract management
( Romzek and Johnston 2002 ). In the case of contracting, because the parties cannot fully predict all
possible future scenarios, contracts are typically underspecified (i.e., incomplete) and may allow
opportunistic vendors to exploit contracts to their own advantage at the expense of the contracting
To minimize such opportunism, the contracting agency must incur transaction costs by
clearly specifying the values sought in performance measures, writing more detailed contracts,
monitoring vendors ’ performance, and enforcing sanctions when necessary. Importantly, the type of
vendor may be less important for low transaction cost services in competitive markets. This is the
case because the risk that vendors will become monopoly service providers is low, performance can
be easily measured, and contracts are easier to enforce. Indeed, prior research suggests that
governments understand this already. They tend to contract more with for-profit vendors in such
circumstances (Brown and Potoski 2003b) exploiting the latter’s competitive zeal and relatively lax
legal requirements through contract specifications and enforcement mechanisms (Brown and Potoski
2004). For governments that are willing and able to invest insufficient contract management
capacity, however, certain types of long-term contractual relationships can foster mutual support and
sharing (Artz and Brush 2000; Hart and Moore 1999; Levin 2003). In so-called relational contracts,
public managers work with vendors to build a long-term relationship based on trust, reciprocity, and
joint involvement in developing and implementing the contract. Over time, though, effective
relational contracts may lower transaction costs through reduced bidding, monitoring, and legal costs
(Hart and Moore, 1999; Tadelis, 2002 ).
A major source of transaction cost is asset specificity that refers to the need for physical
infrastructure, technology, or knowledge, skills, and abilities that can only be acquired through on-
the-job experience or highly specialized investments (e.g., high-cost investments in computer
technology). For winning and losing vendors, investing in an asset-specific service that cannot be
readily translated to other economically valuable activities (i.e., used for other organizational
purposes or marketed to others) leaves them vulnerable to a single (i.e., monopsonic) service
purchaser. This not only raises the costs for vendors to compete in the market, but more importantly
makes it unlikely they will remain in the market for future rounds of contract bidding. Conversely,
for contracting governments, asset-specific services can dangerously privilege vendors that win the
first contracts, thus constraining future competition. Under such monopolistic conditions, the
winning vendor can exploit the contracting government with impunity by raising prices or reducing
service quality. This is a major disqualification for the existence of a competitive market.
Federal and state administrative procedure acts mandating whistleblower and other employee
protections, as well as open records and meetings requirements, create both costs and constraints for
government managers (Cooper 1996). Yet legal requirements can also restrict contracting practices
(DeHoog 1997), such as those that require some percentage of contracts to be awarded to female- or
minority-owned firms. Indeed, private firms and nonprofits sometimes avoid competing for public
sector contracts because of time-consuming and procedurally complex legal requirements
(MacManus, 1991; Praeger, 1994). Thus, legal exigencies can lower market competitiveness,
thereby diluting the advantages of contracting relative to in-house service delivery. This too then is
a major constraint on a competitive market.
Proposition: The absence of even an imperfect market and legal complications compound the
balance in the principal-agent relation to tilt toward the agent even as transaction costs continue to
rise for the principal without any concomitant rise in 3E.
C. Is there a Market Regulator?
A market presupposes the existence of an effective regulator. Agents have competing
interests; indeed the interests of some agents may be more congruent with those of their principals
than with the other agents. Some agents are more risk averse than others; incentives work differently
on different agents. Some agents may also be free riders. And the existence of multiple principals
and multiple agents sometimes increases the informational asymmetries and the difficulties of
monitoring. These asymmetries are among the reasons organizational crimes can flourish
undiscovered for long periods of time buried in complex structures of action (Shapiro, 267). At other
times, multiple parties help to right the imbalance of information, such as when competitive agents
leak information to principals in an effort to get an upper hand over other agents (Waterman &
Meier 1998). Even if it is assumed that a regulated limited market may be the mid-way answer to
this vexatious problem, this would presuppose the existence of a set of regulators with the capability
to support and sustain a market.
In New York City, government delivers services to homeless individuals and families
through shelters run by government and nonprofit contractors. While private firms such as
Lockheed, Maximus and America Works provide welfare services, rising costs are engendering
competition among these and newer players that are leading to sound business management by these
nonprofits (Ryan, 127-36). In Indiananpolis a contractor manages a large share of Welfare-to-Work
programs while in New York City, Homes for the Homeless delivers efficient services to homeless
families. These agencies invest surpluses into infrastructure for the homeless and are seldom
criticized for profiteering (Cohen, 436). Cohen attributes this to the ability of nonprofits to recruit
motivated staff without creating an expensive bureaucracy. A major reason for the absence of private
companies in the sphere of social services delivery is the need for customer subsidy and political
sensitivity to poverty profiteering. Cohen makes a compelling case for privatizing the Emergency
Assistance Unit of New York City’s department of Homeless Services primarily for reducing the
rate of rejections of homeless people since nonprofits are seen to be more caring and motivated than
government staff in accommodating such people apart from the reduced cost of delivery of service
Brown et al state that nonprofit organizations are thought to share similar missions with
government, and thus may be more reliable contract partners (Hansman 1987; Salamon 1995).
Rather than behaving opportunistically, a nonprofit might draw on its own private philanthropic
resources (e.g., volunteers and endowments) to augment services it delivers under government
contract. Yet nonprofits’ goals may not always be aligned with public objectives and may instead
channel residual revenue from contracts into subsidizing their other programs. Nonprofits, in turn,
are regulated as tax-exempt organizations and, as such, are prohibited from distributing profits to
their employees or volunteer boards. Consequently, there may be fewer incentives for them to
engage in opportunistic behavior, at least in comparison to private firms. Then why is there a need
for a market regulator?
Once agencies select a vendor and turn their attention to contract implementation, managers
face more decisions regarding trade-offs among public, institutional, and service-market values.
Perhaps the most central among these involves monitoring and evaluating the performance of
vendors working under contract (Kettl 1993; Praeger 1994). Well-monitored vendors are more likely
to perform according to contract specifications, thereby improving returns from contracting, whereas
legal, institutional, and service-market constraints can increase transaction costs (Brown and Potoski
2003a). These monitoring activities, of course, vary in their costs and efficacy depending on the
nature of the service and existing service-market conditions. For example, in cases in which
governments face vendor opportunism stemming from difficult measurement, managers cannot
simply purchase and monitor service outcomes alone. Public managers therefore have to be fully
conversant with the service process. Sophisticated contract management therefore presupposes the
existence of highly-skilled contract managers to counter contractor opportunism at all levels.
Analyzing the causes of the accident of the space shuttle Columbia, Alasdair Roberts says
that by 2002, downsizing of NASA’s regular workforce created a situation in which contract
workers outnumbered civil servants by nine to one (Roberts, 627). With experienced engineers
superannuating/leaving, NASA became increasingly reliant on an inexperienced engineer workforce
provided by United Space Alliance, the contractor. Thus NASA had no “constructive and
reinforcing” redundancy left to deal with uncertainty in its system (Landau, 356). Van Slyke’s
findings are not dissimilar. Recruitment being a lengthy and slow process, an agency finds it less
cumbersome to claim budgets for services than for new regular staff (Van Slyke, 305). Secondly,
public hostility to expansion of government makes recruitment a touchy subject and dissuades
agencies from filling up even mission-critical vacancies, including contract managers. Politicians too
back public sentiments for electoral reasons for which reason legislative support for new posts or
filling vacancies is often not available (Van Slyke, 305). This, in turn, causes the agencies to do
without adequate contract administering personnel to develop detailed requests for proposals,
evaluate bids, award contracts and provide technical assistance to contractors and evaluating
performance outcomes. In one case Van Slyke quotes a staff of 12 manages more than 500
providers (Van Slyke, 306). Although reporting requirements increase, there is a corresponding
increase in program administration costs. The absence of qualified staff leaves the agency vulnerable
to contractor opportunism. The compounding effect of staff shortage also shows in loss of
institutional memory and policy expertise (Van Slyke, 306). The nonprofits therefore dictate policy
formulation. Similarly, the loss of staff without replenishment whittles down institutional knowledge
that is required to be a smart buyer of goods and services. The loss of staff also deprives the agencies
of any calculated slack that they have to deal with emergencies; contractors being generally risk-
averse maintain the bare minimum staff and have no surplus capacity to deal with emergencies (Van
In specifying a contract, public managers decide on and implement a bid process, select a
vendor, and craft contract terms. Within the contours of legal requirements, public managers
typically have discretion in contracts to specify vendor tasks (e.g., the nature and scope of work),
outcome measures (e.g., performance-based criteria), vendor qualifications (e.g., licensing or
accreditation issues), vendor compensation (e.g., time and materials versus cost plus fee), payment
schedules, contract duration (e.g., short versus long), incentives and sanctions (e.g., rewards versus
punishments), renewal provisions, reporting requirements. Vendors may favor reducing expenses,
particularly if this means pursuing their own (profit) goals at the expense of the government’s
objectives. Shapiro (267) says the assumption that principals are in the driver’s seat—specifying
preferences, creating incentives, and making contracts that agents must follow—is also problematic
(Heimer & Staffen 1998, Sharma 1997). When principals seek out agents for their expert knowledge,
when principals are ‘one-shotters’ and agents ‘repeat players’, when principals are unexpectedly
foisted into a new role with no time or life experience to formulate preferences, let alone a contract
or monitoring strategy [e.g., the new parents of a critically ill newborn (Heimer & Staffen 1998)],
the asymmetry of power shifts from the principal to the agent. The absence of institutional memory
and professional capacity in a public agency can only exacerbate this shift of power.
The increasingly contested political environment of contracting can produce overly rigid and
excessive regulation of contract agencies (Smith and Lipsky 1993; Gutch 1992; Bernstein 1991).
Service providers are asked to submit large amounts of information on their operations, even though
government agencies do not have the capacity for reviewing it. Further, some of the requested
information is not germane to evaluating program quality. For many nonprofit agencies, especially
smaller community organizations, programmatic regulations can lead to major changes in mission,
services, and clients. Service costs also rise because compliance with these regulations requires
contract agencies to add administrative staff and develop new internal monitoring systems. Without
the requisite institutional knowledge, public agencies are unable to enforce their rights of a principal
and remain hostage to contractors’ opportunism without adequate evaluation and enforcement
Proposition: Even if a competitive market were to exist, the limited contract management capability
of public agencies would continue to tilt the principal-agent balance in favor of the agent, since
there would be no effective statutory regulator; consequently, the principal’s transaction costs
would continue to rise without any concomitant rise in 3E and accountability of contractors’
D. Regulation of Contractors
Are the internal controls in contracted agencies, upon which evaluation information is
provided to public agencies, adequate? Dicke studied a state agency on disabilities (AOD) and its
contracted private providers for the delivery of residential services to AOD clients in a single
western state (502-16). The 12 provider organizations in the study received more than75%of the
AOD’s contracted services budget for the fiscal year of 2000, and each provider organization
received on average more than 95% of its residential service revenue either directly or indirectly
from a government source. AOD case managers reported that monitoring was overwhelmingly the
most helpful review procedure used by their organizations to ensure quality in services, followed by
outcomes-based assessments (52%), auditing (31%), and provider self reports (14%), and other
reviews (21%). However, on the overall efficacy of these methods, 29% of respondents felt that they
were “just about right,” 6% said they were “too strict and required too much paperwork,” 13%
offered “some other response,” and 52% said they were “not adequate to oversee performance.” The
percentage of respondents who noted inadequacies in the methods was lowest among case managers
with less than 12 months of service (25%) and highest— more than 54%—among those with more
than 3 years of service. Surprisingly, only 2% of AOD case managers reported no difficulties in
evaluating provider performances using the current accountability methods.
A total of 58% questioned the validity of the information obtained from monitoring, the most
useful method cited by them primarily because quality assessments were based on infrequent visits
(18%) and evaluations were based on snapshot depictions (40%) of on-site conditions that could be
manipulated by providers. An additional 15% of respondents reported problems due to time
constraints and caseload size, which caused a decline in the number of monitoring visits made and
the time spent on-site. The veracity of the information gained through audits and provider self
reports was doubted by 21%. Staff members in 40% of provider agencies reported they had
personally been asked to prepare bogus documents by their supervisors or witnessed others doing so.
Several provider employees noted that inadequate training, incomplete documentation and lack were
Dicke says that other problems relate to the absence of a baseline to assess quality
improvement or decline and a rapid variation in program quality attributed to staff turnover (461).
Case managers noted that positive findings of quality may be inspite of services provided by poor
residential services providers. Some case managers indicated they were “not familiar enough” with
the tools used by their agency for ensuring quality. A lack of political will or support from
hierarchical superiors also reduced the effectiveness of external controls. For example, Dicke says
“controls are compromised when problems are uncovered, but the authority to execute sanctions is
lacking or political support for their use is absent.” (Dicke, 462)
The overriding consensus on social services contracting in state and local government is that
oversight is virtually nonexistent due to a lack of time and resources (Kettl, 1993; Rehfuss, 1989).
Kettl found that state and local government agencies typically devote new staff members or other
resources. In Massachusetts, oversight was so neglected that “the state embarrassed itself by paying
contractors who delivered no services at all” (Kettl, 1993, 175). Similar findings in other states have
been cited by DeHoog (1984) and Milward, Provan, and Smith (1994). Most AOD case managers
reported meeting face-to-face with their clients monthly or less than monthly (55%) (Dicke, 462).
Only 23% reported meeting with clients weekly or more frequently (Dicke, 462). Evidently, the
limited capacity of the principal to check cheating by the agent is often subverted by the agents.
Measurement of performance thus no longer remains a reliable measure of the quality/quantity of
work done by a contractor.
Proposition: Weak contract management capability of public agencies would be compounded by
equally or weaker internal control systems of contractors, both by act of omission or commission;
accountability would be adversely affected and there is unlikely to be any gain on 3E of services
rendered and accountability therefor, despite transaction costs rising for both the principal and the
IV. Role of Environmental Uncertainty/Turbulence
The limited assumptions in public administration literature of the principal-agent theory of
information asymmetry and goal conflict between principals and agents appear simplistic. While
moral hazards and adverse selection are two fallouts of a principal-agent relationship, yet the
multiplicity of principals and agents in a market may cause unlikely alliances to build up between
principals and agents. Both principals and agents often essay dual roles. While awarding contracts, a
public agency is the principal but while evaluating on behalf of a legislature, the same agency is
transformed into an agent of the legislature. Similarly, contractors are not always agents. While
discharging their agency role by providing services they are agents; but when recruiting staff they
are principals. Confounding these complex networks are an entire regime of incentives and
punishments in myriad of permutations and combinations that move risk from a principal to an agent
along a sliding scale. The lower the risk, the lower is the propensity of the principal to transfer its
functions to the agent. The higher the risk, the higher is the propensity for the agent to shirk. Thus an
extension of the traditional limited principal-agent model to arrive at a more equitable solution for
both principal and agent, appears to be the most viable option.
Romzek and Johnston studied five cases of contracts in Kansas for selected welfare (HCBS),
Medicaid and foster care and adoption services (FCA) (423-53). Their most important finding
related to the sharing of risk between the government and the contractors in high uncertainty
situations such as those for the above human services (Romzek & Johnson, 443). With frequent
changes in contract terms on account of a dynamic environment, contractors were apprehensive of
sustaining losses if the entire risk was transferred to them. The Kansas government shifted the
financial risk associated with service delivery on an agency-by-agency basis and proportionate to the
environmental uncertainty. While for the EPS the state retained the financial risk, for the MMC and
FCA programs, the state shifted significant levels of risk to the contractors (Romzek & Johnson,
443). Where the state shifted the risk to the contractors in the case of MMC and FCA, the contractors
faced major financial problems. Evidently, the level of environmental uncertainty conditions the
extent of shirking by the agent at macro and micro levels of analysis.
Dicke and Ott identify ten instruments for enforcing contractual obligations that are presently
used (506-7). They conclude that in human services contracting, what is required is a match between
the levels of explicit and implicit accountability, rather than the existing bureaucratic hierarchical,
legal, professional and moral control standards. Thus the distinction between accountability and
control has been obfuscated (Dicke & Ott, 511-12). The flexibility required to deal with human
services is not available with the present controls (Dicke & Ott, 512). They advocate Outcome Based
Assessments (OBA) for program evaluation that “attempts to determine or verify accountability by
measuring and evaluating the end results of government programs rather than monitoring inputs and
processes.” (Dicke & Ott, 507) OBA treats contracts as treaties that “provide mechanisms for the
parties to adapt to a changing environment, communicate altered expectations, and modify their
behaviors based on their learning-on approach favorable for both flexibility and innovation (Dicke &
Ott, 513). What is therefore required is a proactive and open relation between the principal and agent
that would create trust between them and extend the scope of the contract beyond the written word.
In sum, what is being suggested by implication is a cooperative model rather than an adversarial one.
Smith suggests that a cooperative model is already in vogue. He states that:
As the contracting regime develops, ……………..the unpredictability of public organizations
is reduced through the norms and personal ties of the contracting regime…………. The
norms guiding these networks can provide a way for both government and provider to lower
the transaction costs of contracting and cope with the vagaries of the political world and the
market for contract services. (Smith, 117)
Smith gives another interesting interpretation of the emerging cooperative networks between
principals and agents. He states that in order to build political support for their programs, public
agencies, directly or indirectly build, political associations of contractors. Governments have been
sponsoring formation of interest groups in the last twenty years (Walker 1991; Salisbury 1990).
Government purchasing agencies also occasionally provide seed money for the establishment of
these political associations While Federal and state purchasing agencies are prohibited from
lobbying legislators, these associations are permitted to lobby legislators directly for more money or
new contract programs (Smith, 119). Agencies also release grants to research and consulting
institutions to certify a government position and help in building political support for programs
(Smith, 120) Other instrumentalities of overcoming uncertainty are modification of regulations, new
funding; re-bidding contracts; and re-writing a contract on terms favorable to the provider. However,
this need for compromise to build or maintain political support explains why many regulations
governing contract agencies work against effective performance. For example, one federal program
prevents its agencies from raising money with staff paid with federal funds.
This regulation is a concession to some interest groups and members of Congress concerned
with the spending by contract agencies. However, this regulation is very destabilizing to contract
agencies which need to raise outside resources in order to compensate for reduced federal funding
(Smith, 120). Agents thus also attempt to rewrite the rules and control the uncertainty in the
environment by lobbying for legislation or impose/remove contract conditions in some of which they
are aided by the public agencies themselves. This, in turn, widens both the definition and numbers of
principals and agents and sometimes creates a cooperative environment characterized by
convergence of interest, at least in the short-term. Smith’s view agrees with the tenor of Romzek &
Johnson and the regulation of uncertainty in the race to achieve an optimal fit between the principal
and agent thus comes to center stage. Both the principal and agent therefore have vested interests in
controlling for uncertainty as they strive to achieve their respective optimal fit.
There are certain elements in the operating environment that breed uncertainty. In Herbert
Simon‘s behavioral model an organization simplifies its options according to its computational
capacity in arriving at an optimal benefit decision (Simon, 467-82). The organization considers the
alternatives, its own objectives and then arrives at the optimal pay-off by ordering the available
options – it uses information available to it while weighing its capacity against environmental factors
(“manageable proportions”). An organization has an “aspirational” level to reach which it gathers
information and then ranks the options open to it vis-à-vis a win, draw or lose final result. Thus no
organization adopts “global” rationality; rather stick to “limited” rationality while also considering
the future prospects of its current optimal decision. Applied to contractors and public agencies, both
being viewed as organizations, each of them would attempt to arrive at an optimally beneficial (to
them) decision. In arriving at optimal decisions, the principal and agent would rely on prices,
competition and contracts as governance mechanisms (Williamson 548-77). In sum, the principal
and agent would play out the game in a market place and arrive at an optimal decision, relying, inter
alia, on prices and competition for contracts and the confounding factors mentioned elsewhere in
this paper. However, the market for public services contracts being ill-defined or even non-existent,
would prices and competition be the sole criterion for determining the relationship between the
principal and agent?
Astley’s community ecology approach conceptualizes population forms in terms of their
functional roles vis-à-vis other populations within technologically interdependent communities
(Astley, 224-41) – in this case the public agencies and the contractors. With downsizing in
government, the agencies have had, per force, to rely on contractors to deliver services to citizens.
This has resulted in the creation of demand for services and the emergence of a limited or quasi-
market for services. There is thus an apparent connect between two communities – agencies and
contractors, each of which has to survive on a common reservoir of ideas that binds them together,
albeit in a principal-agent relationship. As organizations (contractors) diversify into new areas
(niches) they establish new populations. New organizational mutations evolve from new technology
and seek environmental space that may require only a “tolerable fit” rather than “optimal fit”.
Translated in terms of the principal-agent perspective, this effectively implies that the
tolerable fit is conditioned by the level of environmental uncertainty, i.e. budgets, govt. regulation,
political and ideological differences, risk-sharing, nature of functions, management capabilities of
agencies, and other confounding factors, some of which may be peculiar to certain categories of
services/contracts, and sundry other key independent variables (that researchers may identify
subsequently) that affect such a fit (the end result is to achieve 3E). Any research design should
therefore factor these as independent variables and derive conclusions about the ‘tolerable fit’.
Proposition: Environmental turbulence created partly by the above discussed confounding factors,
in addition to many others, and the need to minimize transaction costs, determines the level of
cooperation between principal and agent; higher the uncertainty, higher should be the level of
cooperation between principal and agent, leading, in turn, to more cooperative contracting models
and lower transaction costs.
V. Research Design
It is therefore apparent from the foregoing discussion that 3E contracting of public services
and their accountability is specific to a context. Evidently, not all public services make for 3E and
accountability of outsourcing. Thus there exist major gaps in the identification and measurement of
independent and control variables used in research on 3E and accountability of outsourcing. The
transposing of private sector principles that carry with them key economic concepts such as the
existence of markets and perfect competition, profit making motive and all-powerful and non-
transparent Boards of Directors do not seem appropriate to standardized public services with equally
standardized populations whose preferences change, if at all, over a long span of time. Such services
are also often politically volatile and thus generate pressures from citizens and politicians alike, each
for their different reasons. Legal and government departmental limitations and the absence of
general operational autonomy confound the principal-agent relationship further. This makes accurate
measurement of 3E and accountability of outsourcing of public services a much more complex
Therefore the key to any meaningful study of the benefits or otherwise of outsourcing hinges
on identification of similar contexts, populations, geographical areas, etc., definition of independent
variable boundaries with reference to standardized measures and measure their constituent control
variables accurately and uniformly. Unless the control variables for each independent variable are
closely analyzed (as Romzek & Johnson have attempted to do) by professional study, such erroneous
and even ‘loaded’ conclusions about outsourcing would remain common occurrences and thereby
severely undermine the credibility of research findings. Understandably, from a methodological
perspective, arriving at a research model would indeed be a complex exercise, partly on account of
being able to correctly identify the constituent control variables for each independent variable and
devise uniform yardsticks for measuring them. A major challenge lies in defining the range and
scope of each control variable, of which there would be profusion for each independent variable.
This proposal therefore, in its final form, would therefore use a mix of qualitative and
quantitative research on data sourced from similar agencies spread over states (selecting 3-5 counties
in each state) and then grouping them into geographical regions rounded off by inter-regional
comparison for level of analysis. The sample choice and size of counties would be determined with
reference to similar population characteristics and size, availability of similar public agencies, extent
of contracting, problems of public agencies in discharging this role, etc. while determining the target
Thus, for instance, Wake, Durham and Chatham counties, each with a hypothetical
population of greater than 200,000 that have contracted child and/or geriatric care/welfare services
(field selected for its relatively high uncertainty), downsized their City Council managers and
personnel from 1998-2007, incurred similar expenditure in each of the five years, etc. Three other
programs that have been outsourced but with varying levels of environmental uncertainty may also
be chosen for comparative purposes. Going further, the design would source its quantitative data
from complaints received from residents; consumer satisfaction surveys; excess payments made but
not recovered from contractors; fuel consumption by dumpers; adverse inspection reports of
landfills, short deployment of labor, misuse of incentives, results of repeat tenders for contractors,
etc. Following this, the proposal would analyze the quantitative data comparing each sub-category
across counties and all states in the SE United States within the broad framework of the confounding
factors (independent variables) shown in Fig. 1. The level of analysis could be further augmented to
inter-regional comparisons and finally national trends, using the same variables.
A. Government to Governance Model
Fig. 1 shows the research design to be adopted by this proposal. The design is explained in
the paragraphs following Fig.1.
Fig. 1 Government to Governance Model (L-R boxes in Fig. 1 are independent variables)
Extent of Competition C Incentives & Penalties
C O A
Downsizing/Contract O N D Local Ideological Preferences
Management Capability of O T V
Public Agencies P R E
E A R
R C S 3E of Outsourced Service vis-à-
Quality of A T A
Outsourced Service vis Govt. provider
I T I
Levels of Accountability – V Y A Extent of Risk-sharing
Explicit & Implicit E P L between Principal & Agent
8 14 20 26 32
(High) TRANSACTION COSTS (Low)
To elaborate further, each independent variable shown above would have an overall score
ranging from 1 to 4. Using a four-point Likert scale (corresponding to four ranges 8-13, 14-20, 21-25
and 26-32 on the Fig. 1 scale) the sum of the variables in a contract would range from 8 to 32
(maximum score of 4 per variable for 8 variables, 4 being most cooperative and 1 being most
adversarial). The more the score is towards 8, the more adversarial and control-based the principal-
agent relation would be. Administering such contracts would be difficult as the propensity of the
agent to shirk would increase, that would ultimately require ever-increasing voluminous contracts
and rising transaction costs. Matched by the overall decline in contract management capacity of
public agencies over the last decade (upon downsizing), contract management would favor the agent
more than the principal as Boyne has pointed out elsewhere in this proposal. This, in turn, may not
only give rise to subjugation of the public interest to the agent’s advantage but also result in
provision of services the 3E of which are doubtful. Similarly, the more the score moves toward 32,
the resultant cooperation between the principal and the agent, the more accountable the agent would
become and the propensity to shirk would decline, making for more cooperative contract
management. In sum, the higher the level of uncertainty/environmental turbulence; higher the
cooperation between the principal and agent, in the process minimizing transaction costs and asset
specificity. What the scale essentially measures is the balance in the principal-agent relationship and
consequently its impact on the quality of the contractual relationship – a score toward 8 loads the
dice against the principal and in favor of the agent while a score toward 32 is vice-versa.
Thus in a control-cooperation model, government control may move toward 8 on the above
scale and toward 32 as the level of involvement of the agent in sharing of risks, costs, resources and
information asymmetry, etc. increases. This may be reflected adversely in the 3Es of service. It is not
the intent of this proposal to promote a model of pure cooperation without control considering the
large involvement of public funds. The ultimate objective is to derive a standard typology of
contracts appropriate to the context of application that promotes 3E with accountability in the
individual and collective interests of both the principal and the agent. In effect, in the scale at Fig. 1
ratings from 8-16 may be deemed to be adversarial while those from 20-32 may be expected to fall
in the cooperative range of the same scale. By this classification, Type I and II contracts would be
mainly cooperative while Types III and IV would be mainly adversarial. It is also possible that a
principal-agent relationship may have elements of both adversarial and cooperation that this design
factors in by way of the control variables.
B. Typology Matrix
A typology matrix is proposed at
TURBULENCE/UNCERTAINTY Fig. 2 to dovetail the scores from
Fig. 1 into categories of contracts
C as shown in Fig. 2. The scale in
O H I II
O I Fig. 1 is divided into four equal
P G 26-32 21-25
E H ranges as shown in Fig. 2 to derive
four categories of contracts (I, II,
L III & IV). Based on the typology
O 8-13 14-20 matrix, sorting the categories of
contracts in projects (by
Fig. 2 Typology Matrix agency/object) would generate
conclusions. For instance, road
maintenance or a state motor vehicle repair contract may figure in Type IV whereas a drug de-
addiction service may figure in Type I or II. Type III may include a contract that provides for
emergency import and distribution of food to tide over a drought/flood situation but without the
required degree of coordination between the principal and agent. Equally, an executive order raising
road maintenance contractors’ pre-qualification annual turnover for a national highway construction
tender to, say $250,000 from $100,000 may cause a shift from Type I to Type III and a
corresponding shift toward 8 on the scale in Fig. 1 as the risk is shifted to the agent; the converse
would also be true. This typology would therefore clearly bring out the appropriateness of control
and cooperation models specific to fields of their operation. For instance, while road maintenance
which is a routine work may require routine regulation since the uncertainty level is low, child care
services may require more cooperation because of higher environmental uncertainty/turbulence as
Romzek and Johnson have shown in the case in Kansas.
C. Operationalizing the Independent Variables
Due to space constraints, it is not possible to suggest operationalization parameters for all the
variables except for four; researchers may quantify the balance in the light of the literature cited in
this paper. Nor is it possible to create specific control variables without physically reviewing specific
categories of contracts and related documents and deriving a list of variables therefrom. For purely
illustrative purposes let us assume the researcher wishes to operationalize the extent of risk-sharing
between principal and agent. For this purpose, the researcher’s primary sources of information
would be the financial and legal aspects of contract documents such as the extent of reimbursement
of expenses, risk-sharing clauses, speed of reimbursement of costs by the agency, extent of damages
payable for change in contract design or any other set of parameters that show the financial
interaction between the principal and agent, outward and inward flow of reimbursement bills to and
from the contractor, number of complaints lodged by the contractor with the agency for delayed or
non-payment, etc. Each of these criteria would be marked on a Likert scale of 1 to 4 as shown in Fig.
1 and the total weighted score for this independent variable worked out from 1-4 (the total score
shall not exceed 4 for any independent variable; thus each control variable may have to be
appropriately weighted). Thus reimbursement of certain expenses by the public agency to the
contractor that takes more than 30 days after the contractor prefers their bills to the agency may be
assigned a weight of 0.25 while a period of less than 7 days may be assigned 1, per the judgment of
the researcher who would have to decide his own yardsticks of scoring. In other words, at the micro-
level also the above model may also be used to predict agent behavior in conditions of high/low
uncertainty. Aggregated, over a series of similar agencies, the model would pinpoint the quality of
supervision and communication between the agency as principal and contractor as agent. Again,
aggregated over, say 50 counties in S-E USA, this may provide important leads in the processes of
award and quality of management of contracts peculiar to processes, functional sectors and
Similarly, for operationalizing the extent of competition, the researcher would have to go
through the entire process of tendering. The extent of publicity given to the notice inviting interest
(number and geographical and industry spread of advertisements, etc.) followed by the financial and
experience norms in short listing contractors for empanelment, differences in financial bids, actual
award of the contract and terms and conditions (including incentives, penalties and
reporting/oversight arrangements), comparison of retender and new bids, would have to be examined
as control variables and slotted into the Likert scale before working out an overall score for this
independent variable as a whole ranging from 0-4. Aggregated over functional sectors and
geographical areas, this variable may throw up leads on irregular agency practices, contractor cartels,
pricing patterns (to judge competition) and the extent of risk-sharing, etc.
In operationalizing yet another variable – ideological preferences – the researcher may
choose to create a local typology of service contracts from 1998-2007 and analyze it with electoral
changes in local government or even changes in voting patterns at local and state level and changes
in major electoral issues raised by political parties before elections, pattern of legislation
corresponding to electoral promises, etc. as control variables. A major consideration here would be
to analyze the continuation of contracts entered into by previous local governments and the results
on the target clientele – this would bring out whether contracts were continuing without any demand
for them, indicative of extraneous considerations in a control-government model.
Operationalizing incentives and penalties would start from the financial and administrative
details of such clauses in such a manner that such measures regulate environmental uncertainty at the
micro-level. In other words, a contract clause providing for a cash incentive of $50 per waste bin
cleared per day (over minimum contracted quantity) provides an opportunity to reduce the financial
risk of the contractor. However, the same incentive, if related to the number of trips made by
dumpsters could easily lend itself to cheating by contractors. While the former incentive reduces the
propensity for the contractor to cheat, it also moves the quality of the contract towards 32 on the
government-governance scale. However, the latter incentive would prompt more controls to be
imposed by the principal resulting in the scale sliding toward 8. Viewed in the matrix at Fig. 2, at the
micro-level the type would move from Type II to Type III or IV.
D. Applicability of Model
Since this design would invariably involve decomposing the contents of each variable, it
would also make for useful comparison at the institutional and local political level. It may be argued
that a study of this magnitude would be expensive to sustain and require several years to complete.
Nonetheless, the flexibility of this design would permit comparison by different sets of researchers at
unit, local, regional, inter-regional, inter-state and national levels over a span of time by providing a
standardized framework so that the findings can be related again at all levels using identical
benchmarks shown in Fig.1. This would obviate any apprehensions of a long drawn out study, since
it would be open to researchers to define their level of analysis at different points in time. The above
model (Figs 1 & 2) would thus serve a wide range of contracts/services since it provides for
flexibility to add/subtract independent variables without substantially modifying the scoring method
and the matrix that would assure uniformity of treatment of subject contracts within a standard
framework. However, this model, like all others, would necessarily depend on a representative
sample as indicated elsewhere in this paper for accuracy of results, unlike the empirical studies
reviewed by Boyne (474-82).
VI. Directions for Future Research
The suggested research design would involve a multi-disciplinary approach wherein
organizational theorists would share the dais with accountants, lawyers, contract managers,
engineers and other professionals without whose active involvement it would be difficult to conduct
such a technical study and avoid arriving at conclusions the same way studies analyzed by Boyne
and others have. A standard research design with flexibility of application at multiple levels would
enable more systemic reviews to be carried out with relatively less normative standards and applied
within a standard one–size-fits-all framework (and standard independent variables). The benefits or
of outsourcing or otherwise remain virtually unknown as yet. Such a study would also systematically
relate theory to practice and prove to be useful for public managers and legislators and also perhaps
attract funding for studies. Considering the large federal budget outlays on contracts for diverse
purposes, from defense to social welfare and homeland security, such a study (ies) may indeed be
worth the moneys and research effort expended. The gap between the true benefits or loss of 3E by
outsourcing remain mainly a matter of academic conjecture while outsourcing itself remains a fad
without any established credentials as a preferred method of governance. Government may have
physically shrunk but outsourcing has extended government vastly, although not necessarily in the
direction of good governance.
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