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CHAPTER 3
MAKING THE PRIVATIZATION DECISION
Most of the financial and political disasters in privatization I see around the country were easily preventable and come from failure to think through the privatization decision.
- Inge Fryklund, Management Professor
The decision to contract out part or all of an agency's child support
enforcement responsibilities to the private sector has enormous consequences
for the agency and its customers. Too often the decision is made hastily,
for the wrong reasons, and with too little information about possible costs,
benefits, and alternatives. Important program partners and stakeholders
sometimes are left out of the decision making process altogether, only to
re-emerge later-in force-to hinder or block the privatization process.
This chapter addresses the questions: Who should make the privatization decision, and how should it be made? It begins by presenting a sampler of actual privatization decisions made, as they say, by real people in the field of child support enforcement. It then discusses the political and emotional climate that can affect privatization decisions and presents a "controversy continuum" that can be used to anticipate when a decision to privatize is most likely to provoke opposition and turmoil. Finally, it discusses privatization in the context of the Title IV-D agency's ongoing strategic planning process and proposes that any decision to privatize be made with the organization's strategic interest in mind.
A SAMPLER OF CHILD SUPPORT PRIVATIZATION DECISIONS
A review of real-life decisionmaking in child support privatization shows
how tremendously variable-and sometimes volatile-this process can be:
- When the new Deputy Commissioner of the Child Support Unit at the Massachusetts
Department of Revenue wondered in 1991 whether a private contractor could
process child support payments less expensively than his tax department,
he first did some homework. He had the DOR's internal audit group calculate
the average in-house cost per payment posted. This information was then
compared to bids from private companies to determine if this function should
be privatized. Although the cost-per-payment rate for the lowest bidder
was only slightly less than the state's, contracting out offered several
advantages that tipped the scales in favor of privatization: the contractor
could provide around-the-clock processing, staff could be added easily
at peak periods, and the contractor was better able to keep pace with rapid
technological change. Since work was plentiful in the tax department, payment
processing staff whose jobs were privatized were reassigned to similar
jobs in the department. Some, however, were hired by the contractor who
wanted experienced workers. Privatization, in this instance, proceeded
smoothly and without controversy.
- Officials in the Georgia Department of Human Resources realized in
1984 that enforcement workers in some regions had such large child support
caseloads that they could only work their most recent cases. Millions of
dollars from already established cases were going uncollected. They decided
to conduct a pilot program in one county to test the idea of using a private
agency to collect debts in older cases. Although child support workers
at first resisted referring cases to the collection agency, the pilot results
demonstrated that the private company could actually help child support
units increase their output and overall collections. The program was expanded
statewide after one year. No workers were displaced, and the costs of the
contract were more than offset by federal incentive payments received as
a result of the increased collections.
- In Michigan, where the Title IV-D functions are contracted to the circuit
courts, a private collection service has been marketing the success of
the Georgia model county by county. The potential contractor suggests a
collection strategy to local judges and county commissioners, does the
math to demonstrate that a contract would pay for itself, and lobbies them
to privatize a portion of the collections function. So far, the company
has won contracts in two large counties. The state Office of Child Support
is not involved in the privatization decision except to approve the collections
subcontract as part of its overall contract with the circuit court. Although
no local child support staff have been displaced, some resent the intrusion
of the private company and feel a sense of competition.
- Tennessee in 1991 was the first state to fully privatize child support
enforcement in one of its judicial districts. The Department of Human Services
was more or less forced to consider full-scale privatization when a District
Attorney's Office, which operated a local program under a cooperative agreement
with the department, decided to opt out of the arrangement. Because it
was politically unpopular to increase the size of government, neither the
DA nor DHS wanted to hire the additional staff needed to implement federal
child support mandates and meet federal performance standards. Cost was
not a factor in the privatization decision-in fact, it was assumed that
the privatized operation would cost more because the public program was
severely understaffed. Nor did the needs of the mostly non-union public
employees weigh heavily in the decision. The private contractor was not
required to hire or even interview the displaced workers, although nearly
all were eventually offered jobs by the contractor who wanted an experienced
workforce.
- Literally in the last few minutes of the 1995 legislative session,
the Maryland General Assembly resurrected a bill, killed just two days
before, to privatize child support enforcement in Baltimore on a demonstration
basis. The bill, originally championed by a legislator tired of receiving
complaints of poor performance in the city's child support agency, was
greatly modified in a flurry of last minute compromises to assure passage.
Under pressure from the public employees union, the bill was amended to
require the contractor to offer jobs to all current employees at their
current wage rates and with comparable fringe benefits. The State's Attorney
successfully lobbied to ensure that the legal representation functions
provided by that office would not be privatized. A second pilot site was
added for balance-this one, a small rural county where the child support
program was operating effectively, was selected almost at random. Because
provisions in the bill regarding contractor payments and incentives were
rumored to have been drafted by a lobbyist whose company wanted the contract,
and to quell concerns that the state was "giving away the ranch"
to private interests, the cost of collections in the pilot sites was capped
at the 1995 levels throughout the three-year demonstration. The state's
Title IV-D agency at first opposed the legislation, but later supported
it when provisions were added allowing a child support office in another
county to be re-engineered to serve as a demonstration of what the public
sector could achieve.
- Finally, the Title IV-D agency in a large, financially strapped city
(which will not be named for some soon-to-be-obvious reasons) decided to
privatize most of its child support enforcement functions because it had
received instructions from the mayor's office to reduce its 140-member
public workforce by 100 positions before the next fiscal year. Given less
than nine months to meet this goal, the agency made snap decisions about
which functions to privatize and drafted a request for proposals cribbed
almost entirely from ones used in Tennessee and elsewhere. Consultants
were brought in about a month before the RFP was to be released to review
the draft document and determine whether privatization would result in
at least a 10 percent savings as required by municipal law. The review
found that the proposed contract would not reduce costs and would be impossible
to administer because the responsibilities of the Title IV-D agency, the
contractor, and other public agencies involved in providing child support
services were not spelled out. No provision was made for dealing with displaced
workers. Moreover, the collections function-which would attract bidders
because it is an area in which private contractors traditionally make money-was
not going to be privatized. It was to remain with the local courts, which
had always performed this function under contract with the Title IV-D agency.
The consultants strongly counseled against proceeding with the ill-conceived
privatization plan and recommended instead that the agency first conduct
a thorough analysis of all child support operations and contracts. Privatization
could then proceed, if necessary, with an eye toward reducing costs and
improving performance-not with a goal of reducing the number of bodies
on the city payroll. City officials were convinced to postpone privatization,
pending the results of such a study, about a month before child support
workers were to receive their pink slips.
These half dozen examples highlight the various ways in which Title IV-D
agencies have made the decision to privatize child support enforcement services.
They demonstrate the complexities and players involved in decision making
and reveal a bit about the political and emotional context that affects
this process. In many respects, however, privatization decision making is
no different for child support enforcement than for other areas of government.
Let's look at the climate in which such decisions are made.
THE POLITICAL AND EMOTIONAL
CLIMATE OF PRIVATIZATION
As described by David Seader in the previous chapter, the privatization
decision for a public agency is really a "make or buy" decision:
Should the agency deliver the service itself or contract with someone else
to provide it? In the private sector, the make-or-buy decision is always
carefully researched and meticulously analyzed because it has great short-
and long-term consequences for the firm. The decision is ideally a neutral,
objective one, made without regard to the "sunk costs" of past
practices (Seader, 1995). This is rarely the case in the public sector.
Government programs serve people who often are quite dependent on the
service and are suspicious or fearful of change. Public managers, workers,
and their unions have a vested interest in maintaining the status quo and
will fight any attempt at privatization. Politicians whose political careers
depend on the support of unions, public workers, and program beneficiaries
generally line up against privatization. On the other hand, some elected
officials-and a significant and growing portion of the electorate-are ideologically
opposed to "big government" and push privatization as the solution
to all problems. Also, when a public program performs poorly, potential
contractors smell profits and frequently initiate lobbying campaigns to
have the program turned over to the private sector. Finally, government
programs traditionally have done a poor job of accounting for the costs
and benefits of their services. Therefore, decision makers almost never
know in advance whether privatization will improve performance and reduce
costs because usually no one can tell them what the costs and performance
levels are now.
Emotions run high. Public employees fearful of losing their jobs fight
privatization vehemently. Taxpayer groups fed up with what they see as "shoddy
service and high taxes" push for change. Private firms anxious to land
a contract promote their service as the solution to these problems.
The movement to privatize public schools, for example, has become a political
and emotional battleground. Recently, The Washington Post reported
that a District of Columbia school board member received death threats just
for advocating privatization of the local schools. The Post also
reported that a private company operating public schools in Baltimore, Maryland,
and Hartford, Connecticut, had its contracts canceled in both cities because
the local school boards concluded that the contractor had oversold them
on its ability to cut costs and improve student performance. The boards-under
intense lobbying pressure by privatization opponents, including teachers'
unions-terminated the contracts before measures of long-term student outcomes
could be made.
This, then, is the climate in which many privatization decisions are
made. Emotion, ideology, and self-interest often outweigh reason and facts.
While the decision to privatize a service is often quite controversial,
in many instances the decision can be made without provoking much political
or emotional strife. The six examples of privatization in child support
cited earlier demonstrate how the degree of controversy can range from practically
none, as in the case of contracting out payment processing in Massachusetts,
to full blown, as in the attempt to fully privatize services in Baltimore
and the unnamed city.
To a great extent, the nature of the service to be privatized determines
the potential for controversy. Figure 3-1 shows how controversy seems to
escalate as more core services-locations, establishment, enforcement, collections,
and payment processing-are slated to be privatized. The least controversial
decisions for Title IV-D programs involve contracting with a private company
to provide a highly technical service such as genetic screening or automated
system development. Few, if any, would expect the agency to build capacity
to perform these functions in-house. Contracts for supportive services such
as data entry or management training are also low on the controversy scale.
Qualified private suppliers are plentiful and reasonably priced.
Somewhat more controversial are decisions about whether the Title IV-D agency should contract out newly created services. New child support functions that could be provided either in-house or through contracts include in-hospital paternity acknowledgment programs and expanded information and training programs that are designed to assist recently added child support enforcement partners such as banks, licensing agencies, and employers. When deciding to privatize such services, controversy is reduced automatically if existing ceilings on staff size prevent the agency from assuming the responsibility in the first place. On the other hand, privatizing a new service can be quite controversial if it means, for instance, putting highly sensitive information about individuals, such as their credit histories and criminal records, in files maintained by private interests.
Certain child support functions such as locations, serving summonses,
collections, and even support order establishment tend often to be "oversubscribed"
in that there is a greater demand for these services than the public sector
can meet in a timely manner. One solution to this problem is to hire private
contractors to handle the excess demand. In several of the examples cited
earlier, a decision to partially privatize services such as collections
or legal representation sparked a fair amount of resistance because public
employees saw the move either as a vote of no confidence in their ability
to do their jobs or as a sign that their jobs would soon be lost altogether.
Obviously, the most controversial decision is the one to completely privatize
child support enforcement services in a local jurisdiction. This means turning
over to the private sector the core child support functions that have always
been performed by public employees, along with any new functions. Here is
where public employees and their unions, politicians, private attorneys,
partnering public agencies, current and potential contractors, taxpayer
groups, and service customers all join the fray and attempt to influence
the decision in their favor.
Figure 3-1, in combination with the previously cited examples of privatization
decision making in child support, prompts the following observations:
- The farther right one moves along the continuum of services to be privatized,
the more radically the service delivery system changes. More core child
support services are privatized, more public jobs are threatened, and more
organizations and groups are affected by the outcome of the privatization
decision. Each of these factors heightens the degree of controversy.
- The level of authority needed to make the privatization decision also
increases as one moves from left to right. The Title IV-D director typically
has independent authority to privatize noncontroversial functions at the
left end of the continuum; but the most controversial issues, such as full-service
privatization, must be resolved at the highest levels-by county commissioners,
the governor, or the legislature.
- The Title IV-D director and other public officials have the power to
greatly exacerbate or diminish the degree of controversy associated with
a privatization decision. Even a decision that should not be at all controversial
can quickly beget a major brouhaha if, for example, the advantage of privatizing
cannot be demonstrated, the needs of important stakeholders are ignored,
or there is even a hint of impropriety in the decision making process.
Conversely, doing one's homework to justify the decision, keeping all parties
informed, and planning ahead to address the concerns of public employees
can help defuse even the most potentially controversial situations.
STRATEGIC PLANNING: THE KEY
TO BETTER DECISIONS
In response to recent and impending changes in the laws and regulations
governing child support enforcement, Title IV-D agencies across the country
have engaged in a process of strategic planning. They have developed organizational
mission statements, identified program goals and objectives, and developed
strategies for meeting their objectives. Most strategic plans contain goal
statements such as the following:
Goal One: The child support enforcement program will promote parental
responsibility and independence.
Goal Two: The child support enforcement program will deliver high-quality,
effective, cost-efficient services.
The first goal addresses the issue of what the agency hopes to
accomplish. It is stated in terms of improving or changing the lives of
its customers. The strategies for attaining this goal usually include a
mix of traditional child support services, public awareness campaigns, and
aggressive new initiatives such as driver's license suspension, in-hospital
paternity acknowledgment, and new hire reporting. Success is measured in
terms of improved rates of paternity and support order establishment and
increases in the percentage of paying cases and the amount of collections.
The second goal addresses the issue of how the Title IV-D agency will do its job so that the first goal is met. It is stated in terms of achieving certain standards of excellence in serving customers. Strategies related to this goal usually include the increased use of computer and telecommunication technologies, improved training and staff development, re-engineering service delivery and administrative support functions, and-most importantly for the readers of this guide-the privatization of child support services. The primary indicators of success are cost efficiencies in collecting support payments, shorter time periods for establishing cases and collecting and distributing payments, and increased customer satisfaction.
Privatization, then, is the means to an end, not an end in itself. It
can be one component of an overall plan to improve the way child support
functions are performed. In Texas, for example, the Title IV-D agency developed
a three-part re-engineering plan that included expanded privatization, a
new administrative review process for child support cases, and an advanced
integrated automation system. These three efforts combined were designed
to help the state keep up with the demands of growing caseloads. When Wyoming
reorganized from a county-based service delivery system to a judicial district-based
system, each district was allowed to decide if it wanted to privatize services,
and about half did.
In conclusion, the decision to privatize a service should be made in
the context of the Title IV-D agency's overall strategic plan, not as a
tactical response to an immediate crisis. This means, first of all, that
the agency must have a well-reasoned plan that it uses to make decisions.
Secondly, the plan must be explained clearly to elected officials, public
employees, local program managers, and other stakeholders in child support
enforcement so they can see for themselves where privatization fits as an
option. With the strategic plan providing a common ground of understanding,
decision makers will be in a better position to make rational, as opposed
to purely political or emotional, decisions about whether to privatize services.
In addition to having a solid strategic plan, a number of other steps
can be taken to improve the results of the privatization decision-making
process. These steps, which are discussed in the next two chapters, include:
- focusing on outcomes,
- identifying the best candidates for privatization,
- dealing responsibly with current public employees, and
- gaining support for the decision.
