Contracting Out

Contracting out can be defined as formally agreeing with a third party to perform tasks or activities that used to be carried out within an organization. Initially, contracting out, also known as outsourcing, was a businesslike management practice. The term designates a private company's transfer of support activities to a supplier. It permits a company to reduce its expenditure and structural cost by delegating activities that do not form a part of its core function. From this perspective, it is different from subcontracting, which is the practice of a contractor delegating part of its work to subcontractor. For policy analysis, contracting out consists of attributing to a private actor the accomplishment of an activity until then realized by the state or by another public authority. It necessitates the formulation of an agreement between the representative of this public authority and the private contractor. The contractor commits itself to procuring a result in return for a monetary reward. The agreement concerns a single service or can define the way contractors produce this service.

Contracting out is a longstanding practice that predates modern state building and the process of bureaucratization. Several functions or support necessary to the state have tended to be outsourced to private contractors. However, its contemporary form first appeared in the 1970s, when it told a new meaning. At that time, various governments of Western democracies, particularly the United States and Great Britain, launched policies decreasing public expenditure and the number of civil servants. More recently, even parts of the core activity of the state, defense and military policies for example, have been outsourced. This process illustrates the contemporary reordering of the state and the spread of new public management theory among Western administrative and political elites.

Contracting out raises problems of state sovereignty, the identification of public needs, and evaluation. First, the efficiency of externalization practices implies a best-cost choice among various private candidates. Most often, there are few companies, often even only one company, able to supply a relevant service to a public authority. Second, the identification of public needs apt to be satisfied by a private company is a controversial question. Controversy rises in Western countries about the feasibility and legitimacy of such delegations of public services to private business. In some cases, such as defense activities, the content of core activity is brought into question. Third, evaluation problems reduce the efficiency of contracting out. On one hand, when evaluating the cost of the public service to be externalized, the state can have difficulties isolating and appreciating the economic viability of one of its services. Consequently, it cannot evaluate the economic advantage of such an operation. On the other hand, a state can also have difficulties evaluating its private contractor performances. Contracting out implies a loss of competences by the state that interfere with its capability to estimate service needs.

Another negative consequence that reduces the pertinence of contracting out for public management and control of public expenditure is that it produces financial liabilities for the state, often for a long period of time. From this perspective, it can cause management rigidity, and the impractical nature of reducing public investment in all the sectors of state activity. Contracting out thus becomes a restriction factor of the state's control over its own budget and, more generally, of its ability to decide on future courses of action. Opponents of contracting out accept [Page 150]that it can initially introduce flexibility but that it can sap state capacity.

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