Business-Wise Approaches to Government: Privatization at Oakland County
Win, Win and Win
By L. Brooks Patterson, Oakland County Executive
You've heard the old axiom of 'win, win' applied to circumstances where two parties benefit from doing something together. Well, over the last 12 years, Oakland County has undertaken nearly a dozen 'win, win, and win' opportunities where the county, the public, and private business all benefit. The county's efficiency in providing services citizens expect has been enhanced, customer service levels have improved, tax rates have been kept low, and competitively selected private companies have become business partners with the county and the public.
How? Well, perhaps you've also heard the classic business term, 'make or buy.' The 'make or buy' decision process as applied to the public sector means determining the lowest cost possible to deliver -- either by a private business or using public employees and resources -- a service/program, while maintaining or improving its quality and value to customers, be they citizens or employees.
The county identified 11 'win, win, and win' opportunities by applying 'make or buy' analysis techniques to several of its internal and external service delivery functions. The net result has been a nearly $24 million cumulative cost saving to the taxpayers of Oakland County.
The 'why, how, and what' that led to the 'win, win, and win' opportunities is discussed below. An exhibit summarizing the 'make or buy' decisions the county has made during my tenure as County Executive is presented below to illustrate where the cost savings to the taxpayers have arisen.
Why, How and What
When I first took office in January of 1993, Oakland County was facing some tough fiscal times. I put into place an experienced team of professionals with extensive public and private sector financial experience and tasked them with finding cost saving or avoidance opportunities while maintaining -- if not improving -- the quality of services to the public.
By working closely with other elected officials, four 'make or buy' privatization decisions were brought to fruition in my first year in office, saving the county nearly $600,000 a year. As the economy here in Michigan turned around, the tough fiscal times ended for the county -- at least for awhile -- but the county continued pursuing privatization opportunities nonetheless. In the years that followed, another seven service and program privatizations were realized, saving the county an additional $3 million a year.
Fast forward ten years and the county had to weather another economic storm. If the county hadn't made its 'make or buy' decisions over the intervening years, the budget reduction burden on the county this time around would have been significantly greater.
Exhibit 1 provides an overview of what the county has achieved in its privatization efforts over the past 12 years. The types of privatizations ranged from material management to medical programs. To date, the cumulative savings to the taxpayers of Oakland County has exceeded $24 million with a total of 74 positions having been eliminated. Yet, not one employee lost their job. How? While the positions were eliminated to save costs, the employees themselves had the opportunity to move into other open positions within the county or with the private contractor.
You may be asking yourself, what is the 'make or buy' decision process and how is it possible to improve the quality and value of a service while minimizing cost? Let's take a look at how Oakland County did just that with their Materials Management Division.
The Materials Management Division at one time had ten employees and a warehousing facility. County departments requested supplies from Materials Management, who in turn ordered the supplies from a vendor and delivered them twice a week. Depending on which day of the week they placed their order and where they were in the delivery rotation, county staff could wait as long as nine calendar days to receive their supplies. To cover the division's cost of operations, a mark-up on the price of the supplies was added.
Industry 'best practices' indicated that Materials Management was a potential privatization candidate. A task force made up of Management and Budget, Human Resources, and Materials Management individuals was formed. They began the 'make or buy' decision process by documenting the operating costs of the Division -- payroll, fringe benefits, office and warehousing allocations and maintenance. Next, they worked closely with the County's Purchasing Division to prepare a request for qualification (RFQ) to solicit information from potential vendors on website ordering capabilities and turnaround times. A set of objective evaluation criteria was prepared by the task force and used to pre-qualify the vendors who responded. Those that were pre-qualified then received a formal request for proposal (RFP) soliciting information on product pricing and delivery schedules by location. A finalist was identified and their proposed product and delivery costs were compared in detail with the operating costs of the Materials Management Division. The decision was clear -- 'buy,' don't 'make.' So, in the end, the materials management function was privatized, enabling Departments to order supplies directly via the Internet and take delivery of products at their desktop the next day with no internal mark up on price.
David L. Littmann, former chief economist at Comerica Bank and senior economist at the Mackinac Center for Public Policy, is quoted in a recent book review as saying, "The authors [include] a terrific section, entitled "Smarter Spending: Buying Services Competitively." They explain the galvanizing effect of competition in improving government services. This, in essence, is the classic 'make or buy' decision process applied to the public sector. And this is what Oakland County has been doing successfully for 12 years, to the benefit of its employees and citizens.
E-mailArt Holdsworth for further details on this information.
'Make or Buy'