Privatizing and Contracting Out – Do They Work?

This week’s blog looks at the effect and impact privatization and contracting out has on organizations, citizens and, employees.

Privatize is when an organization from the private sector is hired to do the job a public or government entity has done.  It could be the entire organization or maybe segments of it.  Contracting out is primarily the same but it can occur in both the private sector or public sector.  It, too, is when an outside entity comes into an organization and performs specified work.  It could be new or existing work.  Many times, and more recently, contracting out has been done through temporary placement agencies.

From a historical perspective, the government’s role increased following the Great Depression.  The private sector was devastated by the financial calamity and government had to preside in order to take care of citizens.  This continued up to the 1970s and then a new trend started.  Countries other than the U. S. started to look at privatizing services that previously had been public.  By the time Ronald Regan became president, the trend extended to the U. S.  Milton Friedman, an economist of the time, believed privatization could help with budgets, eliminate special interests from taking over, help with government inefficiency and just provide overall better management to government services.

But according to Harvard Business Review, the private sector doesn’t always live up to its role or purpose of providing profits or returns for shareholders.  They write there are many mergers and acquisitions that occur within the private sector that are not successful.  While managers are supposed to be looking out for improving services or products and shareholders’ interests, HBR says, that may not happen.   Once the merger or acquisition has been completed the only outcomes may be lower profits, if that, and employee layoffs.  There is no guarantee of  a happy ending for anybody – employees or shareholders.

HBR also brings up other concerns with privatization. Will the fees of some privatized services be increased for profit motives and become too expensive for citizens?   Or what about issues other than money, like safety concerns, will safety be weakened when profits are the motive?

About three years ago, the state of West Virginia suffered a horrible water crisis.  A private company, American Water, managed, and still does,  the water system for some West Virginia citizens.  For several days citizens were without water because of  a large chemical leak that had infiltrated the water system.  That same company is now asking citizens for its sixth rate increase in less than 10 years.  Rate increases have increased the profit margin for this company to make them the fourth most expensive water system in the U. S.   This experience has prompted citizens to reconsider private sector management of the water system.  They are now looking at putting the water system back under control of the public sector.   As one member of a local city council said  the well-being of citizens will be placed above profits.

On the other hand, the Flint water crisis appears to be the fault of both the private sector and public sector.  Lawsuits have been filed against two companies for not doing what they were supposed to do and public sector individuals have been criminally charged for various wrongdoings.

What is the impact on employees when privatization or contracting out occurs in an organization whether it be private sector or public sector?

Several years ago, we at CALMC had the opportunity of working with a very good labor-management committee from a public sector agency formed to look at contracting out, or privatizing, a segment of work  the agency managed.  The union asked management if they could address this issue together which management agreed.  Both sides started the process with an open mind.  Neither side was starting out with a specific solution.  Management did a great job of providing the committee with the financial information needed to help make the decision.  The union provided an individual who was knowledgeable about business and who could help both sides with the decision.  After several meetings, both sides determined it was better to privatize the work.  The union realized they could not compete. Both sides did agree, though, there needed to be agency oversight of the work so citizens’ needs would be met.

In a study published in 2002 by the Upjohn Institute on contracting out in both the private and public sectors, it tells about the impact on employees, primarily low-skilled workers.  They provided both the good and bad impact of contracting out from auto supplier companies, hospitals and schools.  We look at a few examples from the study and none of these are to make a determination on privatization or contracting out.  It is merely to show the impact to the organization and to both regular employees and those being employed through contracting out efforts.

Contracting out in both the auto supplier organizations and the hospitals was sometimes done through the use of temp agencies.  Both the auto supplier companies and hospitals were being pressured to keep costs down.  Sometimes it brought good results, sometimes there were problems.

Many of the managers from the auto supplier organizations thought the use of temp workers did help contain costs.  In unionized shops, the temp workers could only be used for a certain length of time.  The pay of the temp workers would be the same as regular workers but there were no benefits for them as there were for regular workers.  It also resolved the problem of paying overtime to regular workers.

In non-union shops, the story was a little different.  One auto supplier paid higher wages to regular workers and less wages to  temp workers.  In some of the shops, the quality of work was not good because managers thought the temp workers were not committed to the organization.   Managers wondered if temp workers actually did save money because of the re-work that needed to be done.  Some regular workers ended up supervising the temp workers because of the quality problem.  Even though the auto suppliers would hire some of the temp workers for permanent work, the temp workers didn’t always stay.  They couldn’t wait until the company hired which caused additional training costs.

The hospitals had issues, too, hiring temp workers.  In order to hire qualified help, one hospital had to hire workers at higher wages than regular workers.  When regular workers learned about it, they were not happy and it caused serious problems for the hospitals.  Regular workers resented the temps being paid higher wages and it also lowered morale.  Not all hospitals followed that practice.  Many of them paid the same rate of pay as the regular employees received but without benefits.   Some hospitals also  paid overtime to regular employees when they were short staffed.  Other hospitals hired aides with less skill at lower wages instead of hiring additional nurses.

Schools, too, have been forced to lower their costs.  Both schools and hospitals focused on contracting out food and janitorial services.  Food services were usually national organizations with the experience and staff to provide quality food at less cost than the schools or hospitals.  Many  times it would be the management staff that would be laid off.  The food service companies would bring in their own management and the staff would be employees of the school district or hospital.  This made it very awkward for the employees.  The new management would change job descriptions which sometimes meant more work than what was previously done or maybe the manager wasn’t happy with employees which led to discipline or termination.  Some felt there were too many employees and reduced staffing through attrition.

When entire departments were privatized or contracted out, employees’ wages and benefits were less.  There was one example when a school district contracted out a segment of work, they demanded the wages and benefits of the employees stay the same.  It was noted that new employees had much lower wages and benefits.

The League of Women Voters cites some other disadvantages of privatization.  They include issues related to  integrity and administration and possible corruption or interference by others to do harm.  However, this does not mean privatizing or contracting out is bad.  What is important is  how it is done and how it is managed.

When privatizing or contracting out is being considered, it is something that shouldn’t be taken lightly.  As noted in the examples, it can have some very serious consequences for the organization, employees, and customers or citizens.  It is much better when labor and management look at the situation just as the committee did we worked with and is cited above.  Each side brings a different perspective but both sides need to look at the interests of all stakeholders including citizens or customers, consider different options, and make sure ALL information is available so good decisions can be made.  It also is essential to go back and review the services that have been privatized or contracted out to make sure they are still in the best interest of the organization, the employees and the customers or citizens.

About CALMC Blog

Columbus Area Labor-Management Committee is a not-for-profit organization dedicated to involving employers and employees to preserve jobs, resolve workplace issues, and promote labor-management cooperation. Visit our website at
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