Municipalities Contract out Services... and then Trust
Contracting out is central in today's provision of public services. Once a service is contracted out, governments need to monitor how it is provided. But what type of controls are used by governments to control contracted out public services? How can choices of control be explained?
Bocconi's Angelo Ditillo (Department of Accounting) and Ileana Steccolini (Department of Policy Analysis and Public Management), together with their coauthors, Mariannunziata Liguori (Queen's University) and Mariafrancesca Sicilia (Università di Bergamo and Bocconi's Department of Policy Analysis and Public Management), address this issue by looking at contracted out public services of a sample of Italian municipalities. They report these findings in an article published in Public Administration, entitled: Control Patterns in Contracting-Out Relationships: It Matters What You Do, Not Who You Are (in early view, doi: 10.1111/padm.12126).
They find that municipalities mostly rely on trust-based controls (such as informal communication and meetings) to monitor and evaluate the provision of contracted out services. They are less likely to do this via frequent monitoring and elaborate contracts (a control mechanism called hierarchy), or market based control mechanisms (by choosing the supplier with the lowest price). Furthermore, municipalities are less likely to consider task and relationship characteristics when they make control choices, even though these are considered to have a significant impact on the outcome of these choices.
Previously, literature had focused mostly on the ex ante choice of how to design the public service contract. However, this is just the first phase of the governance process, and at a later stage a firm has to monitor and evaluate the relationship. This can be done by market (to periodically see if someone can supply the same service for a lower price), hierarchy (to control quality and quantity of output, and see if it adheres to strict requirements), and trust (to sit down with the other party, and evaluate whether you believe that this party is competent).
The authors used survey methodology in order to gather data on the extent to which Italian municipalities use these types of controls in two contracted out services, waste management and elderly home-care. They use these data to test two propositions. First, the authors expect that the type of controls (i.e. market, hierarchy or trust-based) vary with different configurations of service characteristics. Examples of these are the extent to which the municipality has to invest in the relationship with the service provider, how dependent the municipality and the service provider are on each other in order to execute the task and how well the municipality can measure the service providers performance. Second, the authors expect that these controls are dependent on the characteristics of the relationship, such as political visibility and knowledge of the partner.
Results indicate that trust is most used, but it is very difficult to explain its usage with the characteristics of the service or the relationship. These variables have more predictive power when it comes to markets, but especially the use of formal contracts and monitoring is likely to depend on service characteristics such as the measurability of outputs.
From a managerial perspective, these results suggest that public managers need to be aware of the different types of controls available, and that they should consider the appropriateness of the controls used in managing relationships with the service providers, taking into consideration both service and relationship characteristics. The current pervasiveness of trust-based mechanisms also points to the need for the development of managerial competences and skills, such as communication, negotiation and networking, together with the strengthening of transparency mechanisms in place between the public sector and service providers. From a policy perspective, the paper also highlights the necessity for regulators to place more emphasis on encouraging the development of monitoring systems for public services, especially for those contracted-out. In doing so, they should avoid the usual "one-fits-all" approach, as the intensity and types of control should reflect the features of the services involved.