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Municipalities Need to Outsource in 2013


It’s no big surprise that governments… not just the Federal government, but state and municipal governments… need to cut dramatically costs. The fiscal cliff, lower revenues, a slow economy, Tea Party pressure for smaller government, fewer Federal support programs, you name it! While traditional media has spent a lot of time talking about the financial problems in Washington, the problems in local government are more severe. There has been relatively little coverage of city and municipal governments that have gone bankrupt, and many more municipalities are considering bankruptcy. There are also a huge number of municipalities that aren't yet ready to declare bankruptcy, but have significant financial problems from their current budget and from the pension fund costs. Financial and political pressure will come together in 2013 to create unprecedented pressure to change… anything… that can get them out of their fiscal mess. Today, we will start to frame these issues, but this discussion will continue in a number of other articles. Today, we’re going to focus on the high level opportunities for outsourcing in municipal governments.

America has over 35,000 municipalities, which are cities, towns, counties and communities. Each state has different ways of defining these entities, and many of these entities are “nested” (ex.: a town inside of a city, that resides in a country). Currently, 40 municipalities have filed for bankruptcy. While that may not sound like many towns, since municipalities were given the ability to declare bankruptcy, only 500 bankruptcies have ever been filed. In the past, almost all of these were entities such as hospitals, not entire cities. This new trend, could grow dramatically.

According to Times Magazine, “Meredith Whitney, who foresaw trouble at Citibank and Lehman Brothers prior to the banking crash, subsequently warned of possible widespread municipal financial crises. In an interview in late 2010 she said that 50 to 100 local governments could potentially default, with losses totaling hundreds of billions of dollars.” This may be a high estimate, but since this prediction, there have been 38 new municipal bankruptcies. That was before Washington makes the pending big cuts to state and local aid programs.

From 2013 into the foreseeable future, we can expect to see rising financial pressure on municipalities, due to: cuts in Federal support, a drop in local revenue, high pension costs, populations moving to larger cities, lower property values and a sluggish economy. Whatever fix that municipalities implement needs to have a big impact, and must last for years to come. Some municipalities have already turned to outsourcing. The small town of Maywood, in California, came to two conclusions. The first was that they could not afford the cost of an independent police force. The second was that their police force wasn't very good; service levels were not met, and the cost of lawsuits was far too high. Maywood’s response was to completely outsource services and only keep the Mayor, the controller and a legal adviser.

Municipalities vary dramatically in size, from towns of a few thousand to cities of millions. It is not possible for very small towns to have the same level of expertise in certain areas as a large city. Let’s look at the typical elements of municipal budget:

POLICE: Just about every municipality has a police department or a sheriff’s office. In most municipalities police services are shared with other municipalities, especially near a major city, where different towns and counties have overlapping responsibilities. Outside of the major cities, smaller municipalities service large areas with overlapping patrol areas. Municipalities could combine their services and outsource: technology, car services and maintenance, patrol areas and administrative costs. Leveraging their combined spend would increase savings. If they outsourced under separate contracts, municipalities would still derive significant benefits from the cross-client experiences of their outsourcer. Typically, a municipality spends 10%-20% of their budget on police services, although every municipality has a different way of reporting a budget. The police budget may or may not include costs for: buying and maintaining patrol cars, the buildings police use, jails, pension costs, and smaller expenses.

The core service for a police department, the service that citizens value the most, is having police on their “beat,” patrolling on foot or in a car. Recent studies in the UK tell us that the time police spend patrolling is rapidly dropping, from a mere 15% of total time a decade ago, to a remarkably low 11% today. An earlier study from Indianapolis, found that 71% of time was NOT spent on: patrol, dispatch calls, or an assigned task. Time spent waiting for something to happen (on surveillance) or time spent driving between locations was 25% of time. Waiting time and other non-core or non-productive time might be dramatically improved with new technologies or different methods of management. But the smallest municipalities lack the expertise or the volume of work to take full advantage of these improvements.

SANITATION: The process for garbage collection varies tremendously between municipalities. Some municipalities have full-service sanitation departments and others use a combination of government and outsourced services. Commercial garbage is usually placed in a dumpster, and a front loading garbage truck picks up the dumpster with a fork lift. Home garbage collection, by contrast, is much less efficient. A rear loading truck is used, with a crew of 3-4: a driver, and one to three workers to collect and insert garbage into the rear hopper, and work the compacter controls. That's pretty much how things have been done for more than 50 years. A new model uses a side-loading garbage truck with a crew of one (the driver). The truck maneuvers next to the garbage can, and a robotic arm picks up the garbage can and dumps it into the hopper. This technology tremendously reduces the cost of garbage collection. Early robotic trucks were problematic. In Toledo Ohio the city has experimented with different delivery models including outsourcing and using a fleet of robotic garbage trucks. Their early experiments did not follow good outsourcing procedures: they outsourced too much, too quickly, using new technology, without a contingency plan. They tried again with an outsourcing partner and the next generation of robotic trucks and things seem to be getting back on track. When you work with a reliable outsourcer, and put a good, staged implementation plan in place, you can dramatically improve your cost structure.

In order to realize this improvement, you will need to make changes that take time to be absorbed by the community. Today many communities are used to just dumping anything by the curb and letting the garbage men sort it out. For the robot trucks to work, you need to have everything in the proper garbage bins. Alternatively, you can have a mix of old and new trucks, slowly educating the community on the new process and converting to full automation. Remember, this is the same transition that commercial waste collection went through when they converted to dumpsters. It took years for most businesses to convert, and it will take communities time to adjust as well. Due to the cost of converting a fleet, and the value of having experienced support, this is another area where cooperation and sharing between nearly municipalities would substantially increase the benefits for all communities. The sharing of equipment will considerably reduce conversion costs, and the increase in scale would allow for lower management costs, and availability of greater expertise.

EDUCATION: Here, it is difficult to develop a single outsourcing direction. Most municipalities provide only part of the educational services. Most communities have numerous private schools, tutoring services and other education services that compete with or complement public schools. Parents not only want their children to do well in school, they also want them to stay together with their friends throughout their school years. The number of different education institutions, the varying quality of services from one school to another, and the influence of individual parents makes this a problematic area for transformative outsourcing.

ADMINISTRATION: There are undoubtedly many areas where municipal administration can be improved by outsourcing, but this is a very difficult area to implement changes. Partially, because administration is a catch-all for many functions, and differs so much from one municipality to another. Also, this is the area where the most political appointees reside, and where politics rather than rules of business have the greatest influence. After other areas have been dealt with, and the remaining operations are simplified, then it’s easier to deal with improvements in administration. For now, move past administration and focus on less political areas.

DEBT SERVICING: This isn't an area where outsourcing can provide much direct help, but this is why you need to outsource. For many municipalities, the problem isn't necessarily this year’s budget, but rather the problem is the accumulation of budget shortfalls from many past years. This is the department that has to deal with these debts, especially the debt from city pensions. In too many municipalities, debt servicing has become the biggest budget item. Aggressive, transformative, outsourcing is needed to create a large enough budget reduction to be able to start paying down this debt.

For many municipalities, outsourcing isn't just an interesting option, it’s a necessary step in order to survive. It's not just a matter of cost. Not all municipal services meet minimal expectations, and too many of services follow an outmoded delivery model. At a time of declining government revenues, it doesn't make sense for small municipalities to re-create services that could be shared with neighboring towns and counties. Even if a municipality insists on managing independent services, there’s still a lot of room for improving and automating services. Bankrupt and financially stressed municipalities need to get out of debt. Outsourcing may be the best option for many municipalities to get budgets under control and still provide necessary services.

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