Managed Competition – The Phoenix Experience

Commentary, Municipal Government, Ronald Jensen

Under managed competition, a public agency competes with private sector firms to provide public agency functions and services. Managed competition attempts to create a "level playing field" between the public and private sectors to select the most cost effective method of delivering public services. Managed competition is used by public agencies as an alternative to direct outsourcing and privatization.

It is my intent to provide a fair and balanced approach to the concept of managed competition. A prime concern is the integrity of the process and the credibility that can be obtained from fair and open competition. While I support a process for obtaining the best possible bid for a public agency, a "win at any cost" approach is not a primary goal.

The concept of managed competition is a management tool to be utilized in comparison with other alternative service delivery methods.

The process of public-private competition was initiated over 20 years ago and evolved into the current concept of managed competition. The City of Phoenix, Arizona became involved in a privatization effort in 1978 that ultimately evolved into a formal process of comparing bids from private firms with the City's costs in a bid format.

It all started as a result of the taxpayer's revolt in California that culminated with the passage of "Proposition 13" on the ballot. This taxpayer initiative had far reaching consequences that spread across the United States. The impact on the Phoenix City Council in Arizona was to stimulate an interest in privatization as a method of reducing municipal costs. As a result of this interest in privatization, the city council directed the city manager to evaluate all department activities in order to determine potential candidates for privatization. The action by the city manager was to request that all department heads review their operations and recommend those services that had potential for privatization activities.

One of the major activities to be considered was the collection of solid waste from residential customers. This in-house activity had been going through a major transformation from manual collection to automated collection. In fact, the concept of automated refuse collection originated in Scottsdale, Arizona and was implemented on a much larger scale by the City of Phoenix Public Works Department. In 1978, about 95% of the city had been converted to automatic collection and only approximately 10,000 homes were still collected with manual collection equipment.

Since the city was far ahead of the private sector in this technology, the only potential for privatization in the solid waste collection field was with the 10,000 homes still collected with manual collection equipment. In order to meet the city manager's request, the public works director submitted a report recommending that the manual collections area be put out for bids by private firms. This action generated strong opposition from the labor union, as there was a potential for lost jobs.

At the city council meeting when the privatization proposal was on the agenda for consideration, the Public Works Director, Ron Jensen, presented a staff recommendation to call for private bids for refuse collection services in the designated area. The union representatives in attendance voiced strong objections to the proposal. The city council, however, voted unanimously to proceed with staff recommendations in spite of union concerns. As the Public Works Director started to leave the council chambers, Mayor Margaret Hance had one final question; She asked: You will compare the private bids with the city's costs won't you? The Public Works Director's response was: "Mayor, we will bid it too". That was the beginning of what today is called managed competition.

While there wasn't enough time to develop a process of public-private competition for the first private contract for solid waste services, the process was started. The city manager brought in the city auditor and the details were worked out for a bidding process in which the city's costs would be prepared by the appropriate department and would be certified by the independent auditor before being compared with private bids in an open competitive process.

Over a period of time, the City of Phoenix was successful in developing a process of public-private competitive bidding that achieved a high level of credibility. In a ten-year period between 1978 and 1988, the competitive process saved the city in excess of $25 million. Initially the city lost one-half of the solid waste program to private firms, but by 1988, the city had won back all contracts and returned to 100% city provided residential solid waste collection services.

As a result of the city's successes, nationwide publicity was generated that was extremely favorable to the City of Phoenix. The Phoenix reputation generated interest by a number of other cities that requested information and visited Phoenix to learn more about the success story. Notable among these were Indianapolis, Charlotte, Philadelphia and Los Angeles. Each of these and many others utilized the Phoenix experience in developing their own approaches to public-private competition.

The theory of managed competition is based on the concept that competition is a driving force that will result in a high level of service at a lower cost. The term "Managed Competition" describes a process of public-private competition that is managed, in that every step to be followed is clearly defined and the roles of all participants in the process are understood.

The process involves a call for bids on the provision of public services in which private firms bid against the public agency in order to determine who can best provide the services at the lowest cost. Every effort is made to create "a level playing field" with the inclusion of all appropriate costs.

Public agencies have developed a number of different approaches to the process of managed competition. In some cases, the public agency bid is prepared by public employee labor unions or employee associations without direct involvement of management. In others, management prepares the public agency bid without the involvement or support of employees or organized labor.

Consultants experienced in the process have been utilized to provide support and guidance to those public agencies that are new to the use of managed competition or lack the staff resources to administer a program. Some consulting firms have specialized in this service and market their services on the basis of winning bids.

The most successful public agency bid processes, however, seems to involve both labor and management working together in a joint effort which utilizes new methods that challenge old non-competitive systems. This joint effort, if successful, improves morale, provides high service levels, and reduces costs. The creation of a labor-management team can be very effective in supporting efforts to become more competitive. In many cases a reengineering effort will be necessary before a public agency will be ready to successfully participate in the competitive bidding process.

The creation of a labor-management team requires a major effort on the part of both labor and management. Old relationships and practices that have developed over a period of time during an adversarial collective bargaining process must be set aside and a new cooperative relationship established. This will require give and take on both sides. This new team will now focus all it's energies on being able to compete with challenges from private firms.

Managed Competition can be a very effective tool in providing the public agency's customers with the "highest level of services at the least possible cost".