Frontier Centre: The City of Indianapolis uses a policy of "managed competition" to decide who will deliver municipal services. How does it work?
Stephan Fantauzzo: The City administration decides what particular functions, or pieces of functions, for example, road repair or pothole repair, it would like to put into the competitive marketplace. Those services are then put out to spec and the union and the City's labor force then has the opportunity to team up with front-line managers and participate in the process of competitive bidding in a head-to-head competition with a number of private vendors.
SF: Typically we will meet with the City in the beginning of the budget year and arrive at some sort of an agreement, through an informal negotiations process, about the amount of work in our various functions that may be put out to bid that year.
FC: Your union embraced "managed competition" as an alternative to a threatened privatization of City services and retained 80% of the work that was put up for bid through that process. Are private vendors doing a satisfactory job with the work that you lost?
SF: In the competitive bidding model, the union is really forced into a variety of different roles. One of the functions that we've now taken upon ourselves is essentially a monitoring function of a number of the private bids to ensure that they're placed under the same level of scrutiny as the City's workforce in meeting the specifications of that bid. For example, in the Parks and Recreation Department, our bids require that the grass is cut once a week and the trash is picked up weekly as well. The union has its own monitoring force that inspects those contractors' parks to ensure that they are being cut on a weekly basis. And our experience has been, where we have contracted out to small companies, the chance for failure and the ability to attempt to cut corners are greater. That has not been our experience in, for example, the wastewater treatment plant, which was privatized to a national firm.
FC: What level of savings has Indianapolis achieved by introducing competition?
SF: The employees in the City of Indianapolis generally win four out of every five bids, and that includes not only work that was previously done by public employees. It also includes the opportunity to grow their work and to bid for work that had previously been contracted out by the City, or work that is new to the City structure, such as demolishing drug houses in the City of Indianapolis, which is what we consider new work to the City. Virtually in all cases, the savings that are produced by City employees in those functions is about 20 to 25% below what the bid price is. In other words, we not only are the low bidder in four out of five bids, but we typically do that work for 75 to 80% of the price that we had indicated we believed we could do it for. The net savings to the City have been about $400 million.
FC: You talked today about cumulative savings, and you mentioned that, had no change been put in place, the budget would have been about $1.5 billion, and that today spending is $900 million.
SF: The savings will continue to grow as long as you're able to keep your costs in check. We've had some major savings in areas like refuse collection, where the majority of that work has now been brought back in and is being done by City crews. The estimated savings there are about $15 million annually, so over a four-year period that would produce approximately a $60-million savings. The cumulative effect of those savings has put us in a position where we have not only been able to increase the level and quality of service provided by City employees, but have been able to do so with no increase in the property tax rate.
FC: But the money was re-invested in more service?
SF: Typically, we have taken the savings and, rather than return that in reduced property tax, opted for a more aggressive program of infrastructure repair. When Mayor [Steven] Goldsmith took office, the estimates at the time were that the infrastructure was in need of about $1 billion of break-even repair, that includes not only our roads but our water system and our waste-water treatment system. What we've done is accelerate the program of repairs using the additional funds that have been procured by savings through the competitive bidding program.
FC: You mentioned that it was very important to distinguish between inputs and outputs.
SF: I think most governmental entities have traditionally focussed on the cost inputs in providing the service: How many men is it going to take? How many pieces of equipment? What size truck should we be using? What is the benefit package? When you look at the competitive bidding model and start to understand the cost structure of providing the service, you quickly understand that those for us are the wrong questions. The question is not, "How many employees are on the back of a refuse collection truck?" The real questions that you ought to be asking are, "How many tons of garbage is that truck collecting?", and, "Does the number of tons collected justify the inputs that are being used in that process?" Through our activity-based costing, we have been able to do two things: Number one, to put ourselves in a position to understand the cost structure and to compare apples and apples with the private sector. But more importantly, I think, our line managers and our line employees have learned to focus on outputs. What do we need to do to create smooth roads in the City of Indianapolis? And then look at the costs of providing the inputs.
FC: How difficult was it for your members to calculate those real costs in preparing their bids?
SF: It was a training process. Really more so than a training process, I would say, it's been an empowerment process. Employees have always known the work that they do, and particularly public or governmental employees, more so than private employees, understand the barriers that are put before them in trying to do a good job. What the activity-based costing allowed us to do was sort of round out the picture, so that employees now understand not only how to do the work, what the barriers are to good government, but also the costs that those barriers imply, and how to produce at an efficient dollar. It has been an extensive training program, but I think when we stop asking employees to park their brains at the door, and simply give us our backs, you'll be amazed at the types of results that are produced.
FC: Have you done any measurement of job satisfaction levels since you started the program? Is there any objective measure?
SF: We measure complaints received. Complaints received under this program have been cut in about half, in terms of taxpayer satisfaction. In terms of member and line-employee satisfaction, one of the key components of our program is a gain-sharing program that only kicks in when line employees and their managers are able to produce a service or provide a service at lower than the agreed bid rate. When employees start working and are involved in a gain-sharing program, you see a dramatic increase not only in productivity but in workplace satisfaction. Employees see a direct result to their input, to their empowerment, and that input is translated into share payments.
FC: So you think that incentive has been very important to the success of the program?
SF: The gain-sharing, first of all, is above and beyond the contractual wage increases and benefits that the union still historically and traditionally negotiates with the employer, but I would say that the gain-sharing component of our competitive program is one of the major ingredients to sustain success. I think you can motivate individuals with the threat of job loss in the short term, but if you're truly concerned with good government and improving the delivery system, you have to give people an incentive to participate.
FC: You talked about how traditional budget systems encourage people to blow the budgets out in month ten. I presume gain-sharing changes that.
SF: Yes, it's a completely different mental thought process. As we get into the ninth, or tenth or eleventh month of a budget, we're used to administrators and line managers who attempt to spend every last dime that they have, and that is completely rational behavior given the system that they work under, with a system that will reward the spending of money by providing at least those dollars or greater dollars in the next budget cycle. The behavior is completely rational given the structure that we place folks under. Under the gain-sharing system, you change the structure. You tell people, effectively, that you are going to be rewarded for not spending money, not for spending money, and when you get down to the tenth or eleventh month of a budget, it produces the exact opposite effect. People are trying to save money, understanding that one out of every four dollars that they save is going to be returned to them in the form of a gain-sharing incentive.
FC: So basically, for an investment, the City is getting a return of three dollars for every dollar.
SF: First of all, it's irrational to believe that any employee is going to tell you how to do a job cheaper and more effectively if the net result of that is that he's going to lose his job in the process. You have to get over that issue in the initial phase. That is logically followed up by saying that if an employee is going to produce savings for a governmental jurisdiction, it is rational to tell that employee that part of those savings certainly will go to the taxpayers and to the general fund, but that part of those savings are going to be reserved to reward behavior that is advantageous to both the employee, the governmental unit and, ultimately, the taxpayer.
FC: That would work in a non-union environment, too.
FC: In places like Germany, unions have functioned as agents for workforce discipline. Has managed competition moved your union closer to that model? Do you weed out your own deadwood now?
SF: I don't think it's a matter of weeding out deadwood per se. I think what managed competition requires is that the union become more pro-active in solving problems rather than reactive in terms of simply filing a grievance and reacting to a problem. I think part of being reactive is identifying problems, whether they're individual problems, systemic problems or barriers to effective government, and developing solutions to that. In the long run, that's forced the union into a role that we've become more and more comfortable with, that role being the role of providing some monitoring and discipline effect to a system.
FC: When new employees come on board, does the union have a say in hiring them, or does the City still look after that?
SF: Well, [it's] one of our biggest frustrations. In many governmental units, there are a number of what I would ironically term as support services that ought to more descriptively be termed as barriers to effective government. They typically are the personnel department, the controller's office, the purchasing office, and it was not uncommon in our particular situation to wait six months to be able to fill a vacant position. That is not irrational, given the system that we operate under. Not to fill a position for six months produced a savings in personnel that produced a year-end saving that could then be touted as an efficiency savings rather than simply doing less work or cutting service. Under our system, we've come to an agreement with the City that has placed the union in a central role in terms of hiring and filling vacancies. If we are going to work under essentially a private sector model, where you are bidding work and are required to do that work and you have a number of inputs, one of those inputs being personnel, it's incumbent on the governmental system to remove the barriers that provide that personnel. So the union has taken some responsibility in making sure that positions and vacancies are automatically filled.
FC: You talked about broad-banding (combining job classifications), and that the union itself came forward with this idea. I think most traditional unions would have trouble with that.
SF: There are barriers to effective government throughout the system. Unions have, over time, developed structures that, while they may have been developed as a defense to favoritism, have had the net impact of providing workplace barriers. We look at a number of issues now that we would never have looked at five years ago, and broad-banding and cross-training of positions is one of them. Typically, the union will now look at the work and the number of employees that we have performing that work, and whether it's possible to upgrade the skills of those employees, upgrade their pay-we always move the employees to the highest pay level-but in doing so, provide a resource, that resource being the human skills of an employee who is multi-faceted and can perform one or two various [more] functions, as opposed to only being able to perform a couple of functions well and essentially having down time when you're not performing those functions.
FC: You described a situation where your workers were actually contracting out parts of their activities.
SF: Part of the process that we go though is an empowerment process, and to a large degree it's a total empowerment process. What we tend to look at, and we have a number of analytical models that help us with this effort, is a review of the work we do to determine two things: number one, those functions and services that we are very good at providing, and secondly, and equally as important, those functions and services that we want to provide, those functions and services that provide a high level of satisfaction to the employees that are providing them. Where we have an intersect of those two, in other words, services that we want to do and services that we have identified as being good at doing, are our core services and they ought to be where we focus our energies and where we expand the work. For a number of our employees that intersect comes at a higher level of job performance. So it was not uncommon for our employees in the housing authority, for example, to come to us and say, “We don't enjoy cleaning graffiti off walls or picking up broken bottles from the parking lot. We would rather be rehabbing vacant units, and believe that we are good at it and know from our own analysis that we are cost-effective at it. So get us over that barrier, provide us with the training that we need to upgrade our skills so that we can spend our time putting more housing units into the marketplace, which will then produce revenue for the governmental structure.” If that means that we should train some of our housing residents [to] remove graffiti from the wall, we ought to pay some of those residents to do so. It seems we can meet both desirable social and public policy, upgrade the level of skills of our employees and provide entry-level work for some of our residents.
FC: You said that Indianapolis was a small-government city relative to its size. If there have been a lot of savings and there have been personnel losses, where have those losses been? I understand your bargaining unit is actually larger.
SF: The City of Indianapolis's work force is approximately 25% smaller than it was six years ago. Those reductions have come primarily in three areas. The City had an historic practice, which is not uncommon in a number of governmental units, to carry positions on the budget, but those positions were never really filled. They provided, in essence, a surplus contingency fund. That surplus fund has been eliminated, so number one, positions were reduced that way. The second way that they were reduced was to eliminate a number of our mid-managerial positions. We had a manager for every three or four employees. When you start looking at the cost of providing the services, those managers become overhead to a system. If we were going to compete effectively with the private sector, we had to get our management to a worker ratio [at] a comparable level; we had to get to twelve or thirteen to one rather than four to one. So a number of those managers either left City employment because of the dramatic change that the system produced, were asked to leave because they didn't fit into the structure or were asked to return to direct service positions rather than managerial positions.
FC: So the reductions were mainly in middle management.
SF: Mainly in middle management, mainly in administrative functions as well. The size of our support services department has shrunk dramatically. The personnel department is probably a third the size of what it was.
FC: You talk about overheads. Private sector contractors will suggest that you have an unfair advantage. They have to pay for certain things that you guys don't pay for. Gasoline, for example, is cheaper, the cost of capital, taxes. How do you react to that?
SF: There are some natural advantages for the public sector workforce in a competitive model. But I think that those advantages are often and usually offset by similar advantages on the private sector side. For example, when we put together our bids, we are forced to carry not only the overhead that is attributable to that department or that work process, but also some general overhead in the City that has nothing to do with the bid that we're preparing. In general, that overhead runs [at] 14% to 16% of our bid calculations, which is a dramatic competitive disadvantage, if you will. The other advantage I think we operate under is full disclosure. Despite the fact that we endeavor to create a level playing field, the reality of our situation is that any private contractor can look not only at our bids but at our work papers and how we produced those bids, and determine exactly where we saved money. The next time that piece of business is put out to bid, we are definitely at a disadvantage in terms of not having had the opportunity to have the private vendors share their decision-making process with us. I think, overall, it levels off.
FC: Last night you discussed the fact that because another department of the City purchases equipment, that you are left stuck with whatever choices they made. The union now has to approve the purchase of major new equipment?
SF: This process, more so than anything else in my mind, is an empowerment process of front-line workers, front-line managers and front-line employees. If we're going to do what the private sector has done years ago, which is essentially a flattened-out bureaucracy, and to push decision-making down to the level where it's closest to the taxpayer or the consumer who's providing the revenue for those services, I think implied in that is a release of power to that level as well. That means those front-line workers have to be involved in all aspects of the job. This is not simply how much we pay people, this is how we design work, what equipment we use to provide those services, where we get our supplies, and I think the union has to be involved in all of that stuff. So now, instead of sending a department director and his girlfriend to a trade show in Palm Beach, line workers go to that show. The net result is we no longer buy trash trucks that don't fit in our alleys.
FC: How has the attitude of the people of Indianapolis generally been towards municipal workers? You know the old idea that City workers are lazy, that one works while four watch. Has the increase in productivity of City workers been reflected in a change in public opinion towards them?
SF: I think public opinion, particularly when the public isn't responsible for the day-to-day decision-making, changes slowly. But we have seen in Indianapolis a gradual and consistent change. The popularity of privatization continues to drop in the polls. People understand, I think, that they give up some flexibility in their own workforce when they release responsibility and control for public delivery of services to private profiteers. Beyond that, the fact that we win four out of every five bids, regardless of the number of vendors that participate in the process, the fact that we end up producing that service at 20 to 25% less than we said we were able to produce it for, has resulted in some renewed confidence in the government to provide effective and efficient delivery of services.
FC: And there is an associated side, I presume, an increase in the morale of your membership?
SF: The employees have more pride in their work and it shows on a day-to-day basis.
FC: You mentioned that the Indianapolis model is being applied in four or five other cities right now. Do you see the number growing? Are you still viewed as a bit of an enemy with your union colleagues in other places?
SF: Change comes slowly, and there has been misunderstanding, particularly with the competitive model. We live in a political environment. To ignore that fact is to ignore a reality of our workplace. That reality, for us, means not only that decisions are made on a political rather than a logical basis at times, but in many situations politics is going to be served first by a number of our elected leaders. The competitive program is one that requires political guts and assumes political risk-taking. Because of that, and controversial work systems in allowing public employees to increase their work responsibility and the size of government, for that matter, in areas that we've demonstrated effectiveness and efficiency in delivering services, the replication of the Indianapolis model has been slow. The City of Cleveland has a similar model, the City of Phoenix has its own model which, although not our model, is very attuned to our model, and a number of other jurisdictions have replicated the model on a departmental basis [in] Philadelphia, New York and in a number of other cities [like] Washington, D.C. Part of that is because it requires less political risk-taking on a departmental basis.
FC: So what's your position now with your colleagues?
SF: The traditionalists still look at us with a jaundiced eye. We've broken our relationship with a number of what I would describe as our traditional allies over this program, not so much in the labor community but in the political community like some Democrats and some church groups. The difficulty for some of our traditional allies is understanding that our first priority and our first responsibility is to our members and to be able to provide a system where they can survive and flourish. The reality of our system is that my employees have averaged wage increases of better than six percent a year when you combine both their regular wage increase and their gain-sharing, and that that wage increase has remained consistent now for five or six years, and that those wage increases are some of the best in the nation, and that's coupled with no lay-offs in a government that has downsized by close to 25%. To some degree it's in the eye of the beholder.
If folks can't understand that, then that's too bad.