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Orange County Voices : COMMENTARY ON PRIVATIZATION : Governments Should Use Outsourcing as a Tool, Not a Panacea : The county and cities should use it as a benchmark against which to measure their effectiveness, efficiency.

<i> Dennis Aigner is dean of the Graduate School of Management at UC Irvine. </i>

Currently in the public sector the dominant buzzwords are “restructuring” and “privatization.” In many areas of business today, intensified competitive pressures have necessitated a variety of organizational changes.

Among the leading ideas are re-engineering, total quality management (TQM) and outsourcing. As government at all levels is squeezed financially, pressures similar to those experienced in the private sector occur. And among the tools available to respond to those pressures is the outsourcing to private contractors of certain governmental services, or privatization.

Even the University of California has become enamored by the idea in its recent initiative to privatize the professional schools of law, medicine, business, dentistry and veterinary medicine on UC campuses.

Unfortunately, in this context the word is misused, since what is really meant is increased reliance on non-state funds to pay for operations and the salaries of faculty and staff.

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In this regard, though usually referred to as a public university, the University of California has, for many years, been funded in the majority by non-state money for its annual operations.

In 1989, before the impact of the state’s budget crisis on UC began to be felt, only 37% of the UC system’s annual operating budget (excluding the national laboratories) was state money. By now, that percentage has dropped to 28% and UC is moving rapidly along the same path followed several years earlier by the University of Michigan: We are fast becoming a public-assisted university.

The UC business schools have had a higher reliance on state funds than the university overall. Interestingly, our Graduate School of Management at UCI is more “private” than any of the other four UC schools of business and management. This year the proportion of state funding in our budget is 38%, down from 52% just four years ago.

The rest of our revenue comes primarily from three sources: tuitions from two MBA programs for working professionals that are not state-subsidized, fees from non-degree executive education, and corporate financial support.

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This fall, as part of the privatization initiative for UC’s professional schools, we will begin charging our full-time MBAs a differential fee of $2,000 per academic year. In 1995, the various UC professional schools will be free to charge fee differentials according to the market conditions they face.

In effect, we will begin to operate exactly like a private university does. This is not altogether a bad thing, since the “discipline of the market,” as it’s often referred to, can have some very beneficial effects; in particular, a focus on customers and constituencies, and pressures to keep organizational structures from becoming bloated bureaucracies.

The tremendous financial pressure on our county and municipal governments in recent years has encouraged them as well to look critically at the efficiency of their delivery systems and processes, and to explore the possibilities for privatization.

Three years ago, for example, the county of Orange initiated a comprehensive study of opportunities to extend what was already a fairly aggressive program of outsourcing, with annual contracting of $900 million.

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At that time, 56 additional privatization opportunities were identified, of which 12 have been implemented with additional cost savings of $450,000 annually. Twenty-five others are still under review. A significant barrier to further implementation is a state law that prohibits contracting for certain labor services like institutional food, maintenance and custodial services.

A pending bill, SB 84, would amend that law and could result in additional savings of $8 million.

The cities of Irvine and Anaheim, among others, have also moved aggressively in this direction. Today, 20% of Irvine’s General Fund expenditures are contracts. The internal staff has been reduced by 25% over the past three years and several other heretofore in-house functions are under review for possible outsourcing, including facilities maintenance, information services and engineering.

Anaheim, like the county, embarked on a privatization study in 1991 that identified 34 services with potential for privatization in addition to the $126 million annually in contracted services already in place. Their evaluation and subsequent implementation is ongoing.

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Privatization is a tool, not a panacea. In the spirit of total quality management, the county and the cities should use the opportunity to privatize as a benchmark against which to measure their effectiveness and efficiency in delivering government services in an ever-increasingly competitive market.

The crucial test of privatization is whether an adequate contract can be drawn to accomplish all the salient aspects of the previous in-house function.

For example, as of fall, 1992, Anaheim had actually brought back in-house seven functions that were contracted out at one time but for various reasons were not being handled adequately. Given the latitude to compete and with a benchmark to shoot for, many times the existing governmental unit can rise to the challenge.

But in this era of corporate downsizing and organizational restructuring, some of the adjustments are unavoidable and very painful. Like it or not, the capacity of our tax base to support government and higher education at the levels we were used to throughout most of the ‘80s has fundamentally changed.

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To be a bit philosophical, it’s important that everyone do some serious spring cleaning once in awhile. The tool of privatization can be helpful in identifying and discarding things that no longer serve us and improving those that do.

In the process we might even find that special something we seem to have lost long ago in government and public higher education: accountability.


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