Outsourcing in the public sector means "contracting out" functions that historically have been provided by public employees. The belief that there are functions best performed by the private sector is not new, and moving these functions from the public to the private sector requires a fair and open process in the public's best interest.

NIGP: The Institute for Public Procurement recognizes that the outsourcing of particular governmental functions can be a fiscally sound tool of responsible public administration. However, identifying and assessing the elements of public performance most appropriate for outsourcing — and ensuring a successfully executed outsourcing decision - is a substantial challenge for everyone.

Public procurement offers a uniquely qualified and professional resource for government decision-makers considering outsourcing alternatives. The Chief Procurement Officer (CPO), Procurement Director or Purchasing Manager serves a strategic role in a public entity's decision to outsource. The CPO is central to a fair, transparent and effective outsourcing process. While the decision is ultimately reserved for an elected body or senior executive, the CPO is prepared to provide informed insight on market structure, cost, risk, competitive methods and contract form as these factors impact the quality and cost of services. The CPO is uniquely positioned to help design and manage a process to achieve a successful public outsourcing effort. It is therefore important to engage the CPO early as a strategic partner to assess and to administer any ensuing selection and contract formation process.

While examples of outsourcing exist from more than a century ago, outsourcing gained momentum in the United States and Great Britain in the early 1980s. Both governments established criteria for contracting out a process or function. OMB Circular A-76 is the current guide used for outsourcing at the federal level in the United States. Many states and local jurisdictions have adopted similar guidance. OMB Circular A-76 provides insight on how to outsource while describing the characteristics of "inherently governmental activities" versus "commercial activities." It does not, however, offer a definitive list of which functions are "inherently governmental" (and, therefore, should not be outsourced) and which are potentially "commercial."

Two questions, each with their own considerations and processes, confront a governmental entity: (1) Whether to outsource; and if so, (2) How to do it.

Whether to outsource

OMB Circular A-76 defines "inherently governmental activity as "an activity so intimately related to the public interest as to mandate performance by government personnel." These activities require the exercise of substantial discretion in applying government authority or in making decisions for the government. Inherently governmental activities normally fall into two categories: the exercise of sovereign government authority or the establishment of procedures and processes related to the oversight of monetary transactions or entitlements.

An inherently governmental activity involves:

  • Binding the United States to take or not to take some action by contract, policy, regulation, authorization, order or otherwise;

  • Determining, protecting and advancing economic, political, territorial property, or other interests by military or diplomatic action, civil or criminal judicial proceedings, contract management or otherwise;

  • Significantly affecting the life, liberty or property of private persons; or

  • Exerting ultimate control over the acquisition, use or disposition of United States property (real or personal; tangible or intangible), including establishing policies or procedures for the collection, control or disbursement of appropriate and other federal funds.