Over Outsourcing

September 13th, 2011 at 9:32 pm

Here’s a great read from this AMs NYT on how the outsourcing of jobs by the federal government ends up costing more than it would to do the work in-house.

“The study found that in 33 of 35 occupations, the government actually paid billions of dollars more to hire contractors than it would have cost government employees to perform comparable services. On average, the study found that contractors charged the federal government more than twice the amount it pays federal workers.”

But wait, you’re thinking…isn’t it well established that government workers are paid more than comparable workers in the private sector?  (Actually, that’s typically not the case for workers in white collar professions; more so for blue collar.)

Well, the folks who did this study—The Project on Government Oversight—went about it in a more revealing way than simply comparing pay rates between sectors.   They compared the costs of private sector contracts with what it would cost to do the work by the federal workforce.  The result, then, is due to the mark-ups over labor costs in the contracts.

In other words, while the pay differential between a government accountant and a private sector accountant is about $40,000 per year ($125K vs $83K, see Table 1 in the report), the annual billing rate by the contractor is $299K!  Peruse this table…it’s an eye-opener.

It’s a great example of how you’ve got to carefully check out those knee-jerk, ideologically-motivated positions like the one that we can save taxpayers oodles by outsourcing government work to the oh-so-efficient private sector.  It’s but one study, and it’s worth following up with more of this type of research.  But it suggests that while the private sector may pay its line workers less than does the gov’t, somebody’s cleaning up on the overhead, and at taxpayers’ expense.

Update: A colleague made the good point that POGO should really have included “markups” on the gov’t side in their study as they did on the private side.  That is, a government accountant, e.g., is supported by hours of other staff members, including supervisors and support staff, along with equipment.   An apples-to-apples accounting should include these costs as well–I doubt, however, that they’d be large enough to erase the differential in the table linked to above.

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21 comments in reply to "Over Outsourcing"

  1. Chris says:

    I find it interesting that the occupation with the best payout for outsourcing is groundskeeping (~$64K government pay vs ~$52K private billing) which is anecdotally associated with high rates of illegal immigrant employment.

    • Scott says:

      “illegal immigrant employment”

      I think the none PC term would be slaves.

      I worked for a Landscape Management co. that used to pay US laborers $12/hr. They fired all of the US laborers and contracted a staffing firm that specialized in importing cheap labor. The new labor had a total cost to the company of $12/hr. The staffing firm payed minimum wage to the Laborers minus housing, transportation, health care, etc.

      Management always complained that US labors were too lazy. They wanted things like: days off, sick days, slow downs when temps were over 105F, raises; you know, the stuff that leads to a better life.

      On the Economics of it the Republicans and Supply-Siders have it totally right. The company didn’t downsize because their customers had huge holes in their budgets and canceled contracts, thus reducing demand. It was those darn US labors wanting high wages, high taxes, and burdensome regulations. Corporations will fix the economy, Not a Government for the people and by the people. (Oh wait..that doesn’t..sound right?)

      Ok I’ll stop, that touched off a nerve, or something.

  2. sven says:

    This sort of issue is what sprang to mind when I heard that Michigan is looking at hiring teachers privately.Is it impossible that teachers could be paid less? In the current economy it does seem likely that new teachers could be forced to take lower wages than current hiring agreements dictate. Having said that, it seems unlikely that a firm could hire teachers, administer a new hiring program, make a significant profit, and still deliver the cost savings advertised. I suspect a more likely result is Medicare Advantage for teachers. Private firms unable to deliver at the same cost as public agencies turn to sympathetic politicians to raise the rate under contract.

    The teachers would be in worse shape, the districts would not cut their budgets, but schools would be ‘privatized’.


  3. Red Planet says:

    Duh. Really.

    It took a study.

    • IAdmitIAmCrazy says:

      As a (foreign) government employee I always suspected something like this. I remember back in the eighties when EPA outsourced a lot of lab jobs, later evaluation showed that about two thirds of the results produced by the outsourced labs were rubbish, and nobody in EPA had sufficient knowhow to detect that.

      POGO’s study seems to have been done rather carefully, and the authors point out a lot of lacunae in the government data pertaining to outsourced services. Furthermore, in footnote 74 they state: “This study was a quantitative rather than qualitative study, and did not look at outcomes of contractor or federal employee performance. In general, cost comparisons should be a factor—but not the only factor—when assigning service tasks to either federal or contractor employees.”

  4. Jackson says:

    I will offer public broadcasting as another environment in which brain-dead neanderthals decided that maybe workers don’t need organized labor. WGBH, I suspect, will prove to have a higher management/worker ratio, because a bunch of s&(ithitheaders in management have decided there should always be more managers than workers.

    And what has come out of all this? A bunch of idiot managers dedicated to covering their own butts. Yo, Bob Lyons, you’ve done so little for so many. There is no reason that you should not stand up and be proud…

  5. general c. san desist says:

    …seems another version of the same old argument…on the eve of Roosevelt’s inauguration the austerians were denouncing teachers salaries for the intolerable tax burden suffered.

    Them teachers…after 80 years, still can’t get respect. Here’s my inter week musical interlude…The Song Remains The Same. History is a bitch of a witness.

  6. Michael says:

    I thought the point of all this outsourcing was to provide an inferior product and create patronage opportunities.

    Culture of looting, and all that.

  7. azlib says:

    As a consultant/contractor in periods of my life, this comes as no surprise to me. You should outsource in areas outside your core expertise or in areas where the contract is rate less than the cost to train and supervise employees.

    Unfortunately, outsourcing has become more a fetish than a rational business decision. The mantra that the private sector can always do it better or cheaper than the public sector seems to trump all reason when the opposite is often true.

    • Will says:

      I thought it was common knowledge that there was substantial mark-up when hiring contractors and consultants. At least it is in the private sector! :-p

  8. Michael says:

    More seriously, isn’t this what Coase referred to when he discussed why we even have firms? Transactions costs defeat moral hazard and improved bargaining positions for employees. So rather than frittering away wealth through transactions costs, we reluctantly allow employees to capture more of the surplus.

    Hm, maybe we’ve established another Republican motivation for outsourcing. They will do anything in pursuit of Class War.

  9. Mary Carson says:

    Does the table include levels of supervisory management costs? I’m not sure, but I think for some jobs the cost of supervising the front line employees is significant, and I don’t know how it differs in public vs. contract jobs.

  10. PeonInChief says:

    I thought everyone already knew that the point of contracting out was not to save money, but to move political support from unions to Democrats, to contractors to Republicans. It wasn’t ever about saving money. This should be part of common knowledge.

  11. Karen Sumpter says:

    As an individual who has worked for some of these private contractors and was involved, as Proposal Manager, in submitting bids to the government to win these contracts, I’d like to point out something that seems to have been overlooked in the analysis. The contractor billing rate includes salary paid to the employee and all additional sums paid by the contractor, such as payroll taxes and insurance. The federal government mandates some pretty generous benefits that must be provided by the contractor to the employee. It would be more reasonable to include the amount of taxes and insurance paid by the federal government and the private sector in the comparison – rather than billing rate to salary.

    I’m not saying that contractor’s aren’t overcharging, but that the analysis distorts the amount by the way it does the comparison.

  12. general c. san desist says:

    …thinking there is no cure to outsourcing, just an inoculation. The government to private then private to offshore, that’s about the chain of events.

    Now, with the Solyndra witch hunt, the congressional ankle nippers can be real bone breakers. The real tragedy of this affair will be the non-wake up call about further dismantling of our industrial competition with the Chinese gaining at every turn…of the screw.

    Shouldn’t the subcommittees be investigating & gathering testimony on the return of industrial manufacturing to our shores?

  13. Bill says:

    One part that would benefit the government immensely besides redistributing/eliminating money for contracts is to confront the hiring and firing practice. As a DC resident I have seen firsthand that the difficulty to even impossibility of firing someone severely distorts productivity and resourcefulness. Tenure should never be allowed.

  14. Edward Saltzberg says:

    I may be wrong about the data, but government employees have an overhead also, which may not have been included in the comparison. That might tilt the scale in favor of contractors. Also, many contract employees work on a project and are not necessarily full time. So, they do the job and go home and the total cost may be less to use a consultant than a full time government worker.

  15. jamie_2002 says:

    The cost to the government is 83% higher, but the money is not going into higher wages and benefits for the workers.

    Where is the money going?

    Into the hands of business owners.

    Your taxes are being given away to enrich republican supporters.