Weighing Outsourcing

You may save money on school services for the district, yet does it come with unintended consequences? by WILLIAM J. MATHIS AND LORNA JIMERSON

The Umbridge School District’s hot lunch program was hemorrhaging red ink.

Each year, the school district poured more money down the sinkhole. At the same time, parents complained about the quality of the school lunches. The food services director always had excuses and nothing really changed.

When no headway was evident, the superintendent said to the board of education, “The only way we’ll fix this mess is a clean sweep. Let’s outsource the food program.”

William Mathis and Lorna JimersonWilliam Mathis and Lorna Jimerson co-authored a 2008 report, "A Guide to Contracting Out School Support Services."

So the district entered a five-year contract with an out-of-state chain involved in institutional food preparation. Selling their equipment to the vendor threw a small fiscal lifeline to a floundering program. To the district’s leadership, this looked like an optimal solution.

Downside Emerges
After a few months of positive energy and momentum, the parent complaints started anew. Fried bologna with macaroni and commodity cheese for lunch wasn’t exactly a balanced and nutritious meal. Telephone calls to the operation’s local manager went unanswered as did calls to the out-of-state corporate office. However, the company did regularly send bills, at the higher supplemental rate, for extra services such as the cookies and punch at the school’s open house and the special lunch for military veterans.

At a school board meeting, the PTO president of an elementary school asked why Mrs. Crombly, the church organist, had been let go from her long-held position as a cafeteria worker. As a widow, her hours working in the school lunch program were her only means of support. Principals commented that school-based jobs had now gone to out-of-towners at a time when local unemployment already had exceeded 20 percent owing to the closing of a local factory. The minimum wage being offered by the contractor was not a livable wage.

The school district’s business manager reported to the superintendent that the new arrangement was actually costing more money than what the district previously had spent in its money-losing operation. When the reporter from the Umbridge Eagle called, she wanted to know about the new lunchroom worker whose mugshot appeared on the state’s sexual offenders list.

Fiscal Pressures
While not all of these events happened at our hapless Umbridge (a fictitious school district), each of these events did arise in a public school district. Certainly, outsourcing of services can be a fiscally responsible and satisfactory way of doing school business. But school administrators must carefully weigh all the direct and indirect advantages and disadvantages before deciding to outsource.

Considerations Before Outsourcing Services

Often, the most cost-effective solution is internal management reform. If contracting out seems your best solution, make sure you take the following points into account:

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Districts around the country are experiencing intense pressure to lower costs. Ongoing requirements of state and federal accountability schemes, escalating health care costs, increasing expenses for utilities, and a seemingly unending stream of new and costly mandates are now coupled with the harsh realties of a global recession. All these factors overlap and challenge public schools to do more with less.

One reasonable approach to reducing operating expenses is to outsource student services. There are many private vendors who specialize in school-related tasks and almost always promote their businesses with promises of lowered costs. According to a 2001 survey published in American School & University, the most frequently contracted services include transportation, vending, heating and ventilation, computer servicing, office machinery, food services, security and custodial services. Among these, food services, custodial and transportation are the most visible, have the most direct contact with students and consume the greatest proportion of school budgets.

Outsourcing in the education arena is not new. Schools always have looked to private firms to provide certain services. What is different is an expansion of the types of services and the transition from local vendors to large corporations. Traditionally, only noninstructional student services were considered as possible targets for privatization. However, there is increased movement to privatize entire school systems via vouchers, charter schools and education management organizations. And the Rockville, Md.-based Education Industry Association says most of its members today either provide instructional services or technology (hardware and software) to school districts.

Education Week reports vendors, with a contemporary twist and an eye on the federal stimulus money, are flooding districts with e-mails and brochures offering their sure cures for making adequate yearly progress under No Child Left Behind.

The primary objective of outsourcing traditionally has been cost reduction, but it also has other potential purposes. A secondary goal is easing administrative burdens, by shifting tasks to private vendors. This theoretically allows school district administrators to spend more time focused on instruction and less time on problems and complaints about issues such as school bus routes.

In addition to cost savings and ease, district officials should consider a few other key issues when making decisions about privatizing — the degree to which outsourcing can ensure quality of services, the social costs of outsourcing and organizational flexibility.

Lowering Costs
“You can drive down student transportation costs.”

Thus proclaims the website of the nation’s largest student bus company, Laidlaw, which is owned by a major corporation based in the United Kingdom. The company cites an “independent survey” that shows outsourcing can save 10 percent or more for student transportation. Is this accurate? Perhaps.

To answer the question requires careful cost analyses — before you sign a contract. Are the assumptions about transportation use realistic and inclusive? Are your comparisons “apples to apples”? Are intangible costs and savings considered? Are there add-on costs?

Ultimately, whether you save or lose money depends on what’s in or out of the contract language.

A 2008 study by Gordon Lafer and Bob Bussel of the Labor Education and Research Center at the University of Oregon illustrated how school districts found themselves with large cost overruns because of hidden costs either contained within the depths of dense, complex contract language, or not covered in the contract to begin with.

Other districts found themselves with “sticker shock” when the contract language was overly restrictive about the work to be performed. Custodians, for example, may be exempt from doing extra work that occasionally is needed. In other cases, extra work can be charged at much higher rates than what normal responsibilities would cost. Cleaning up after that traditional annual picnic may prove to be mighty expensive.

Some districts have found that indirect costs are not included in cost analyses. Some contracts, for example, require districts to provide office space and telephone service for vendors and to cover all repair and routine maintenance of equipment. Other contracts add extra charges for management fees based on student census. And contract-monitoring responsibilities still fall on the district’s shoulders and must be considered as an indirect cost.

According to the News and Record, the daily newspaper in Greensboro, N.C., one local school district expected to save $1.2 million over four years by outsourcing its custodial services. Instead, it actually saved only a 10th of that amount during the first year, then lost money in the following years.

School districts also must be aware of “lowballing.” In this practice, vendors offer low costs for the first year or so. Once in the door, districts have found themselves faced with rapidly escalating charges in later years. This is especially problematic when returning to in-house operations, a transition that can be expensive, difficult or impossible. Districts may have sold their bus fleet and have no option except to retain the private vendor. Depending upon location, no other private contractor may be available.

Thus, district leaders must be vigilant about the terms in the contract to avoid loopholes, hidden costs and unexpected cost overruns. Having your contract scrutinized by an outside, independent specialist and a qualified attorney is essential. (Of course, these expenses also are typically unconsidered costs of outsourcing.)

Administrative Time
School leaders, understandably, find it appealing to get the management of such duties as food services off their desks. Dealing with noninstructional issues such as bus routes, cafeteria menus and complaints about school cleanliness distract school administrators from focusing on student learning. Unfortunately, the goal of easing administrative burden is not always met through outsourcing.

Writing RFPs, evaluating bids and monitoring contract compliance still takes administrative time. In addition, many of these areas are highly regulated. Bus drivers must be trained in disciplinary procedures, first aid, restrictions on idling, etc., as well as pass drug and alcohol screening. Though training may be provided by the private vendor, it remains the school district’s responsibility. School districts are still responsible for ensuring that student services are adequate, reliable, safe and legal.
Many contracting firms suggest school districts have a single individual designated as contract monitor. Whether full-time or part-time, this is still a school district cost. And when problems arise, school administrators are responsible and have to be responsive.

Quality Assurance
A particularly thorny problem for districts is how to ensure quality services while lowering costs and reducing administrative burden. Can it be done through outsourcing? Well, maybe.

Private vendors are in business to make money. And the primary way private companies maximize profits is to lower their personnel costs. Contractors often offer lower salaries and reduce or eliminate benefits to their employees.

Additional Resources

Bill Mathis and Lorna Jimerson suggest these additional materials about contracting out for services at the school district level:

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This common practice has several ramifications. Case studies show an unusually high turnover rate among personnel employed by outsourcing firms. Often this translates into not enough employees to get the job done properly and/or inadequate training of new hires. Staff members who are not part of the school culture can sometimes be dysfunctional. When unqualified staff are hired, it can have serious consequences for the district.

An audit in New Jersey revealed a private vendor failed to complete criminal records checks on newly hired employees. The investigation was instigated when custodians were caught stealing district laptops.

Another way of reducing costs and maximizing profits is to scrimp on the quality of products used. Cheaper is not usually better. Cleaning supplies should be nontoxic; food needs to be fresh and nutritious; bus parts must be safe and reliable. Buying second-rate brake pads or linings is simply not an option.

To be sure, the number of private contractors who use dangerous or poor-quality products is likely small. District officials, nevertheless, have to be cautious. Schools cannot compromise safety or quality services when outsourcing.

Social Costs
Often unacknowledged are the ways in which outsourcing may impact the wider community. The practice of offering low wages is especially problematic. Veteran school employees often are forced to accept decreased wages with the outside firm or seek employment elsewhere.

The loss of long-standing local and loyal employees can cause political backlash for schools and, even more importantly, can cause hardship for community members. School-based custodial, food service and transportation positions have traditionally provided good, reliable job opportunities with health benefits. Often these are the people with the least formal education, single parents or those needing part-time supplemental work. When it is the parents of your school children who are laid off, the effect on the school is immediate.

Pay cuts, as a byproduct of outsourcing, can be significant. Lafer, a researcher with the Labor Education and Research Center, describes one Oregon school district where average salaries for new bus drivers plummeted from $11.37 an hour to $8 an hour after outsourcing transportation. In another instance in Illinois, salaries dropped 52 percent for food service employees when a private contractor took over the operation.

Some outsourcing contracts include grandfather clauses to deal with the issue of displaced employees. Often the incoming firm will promise existing workers will receive preference and/or guarantees of wages equal to previous years. These provisions are helpful. Sometimes, however, the contract language is vague and misleading. Previous employees may be automatically granted an interview, but not necessarily rehired. Sometimes the salary guarantee expires after the first year.

The negative social impact of outsourcing can be wide-ranging. Minimum- and low-wage positions contribute to maintaining a disadvantaged underclass and often wind up costing society even more through the need for social services, lower income tax revenue and increased health care costs. An economic analysis in Oregon found that for every 25 jobs lost through privatization in public schools, the local economy lost $233,000 due to decreased spending.

In addition, outsourcing that uses a national or international company can be viewed as an extraction industry, as locally generated taxes and local workers generate profit that leaves the community, the state and, in some cases, the country. Small local companies may be forced out of business by large private corporations.

Limiting Flexibility
Like the weather, school days can be unpredictable. Opportunities arise. Situations change. Events happen. A leak in the roof may require immediate cleanup. A downed power line may require a different bus route for the afternoon run. An unexpected opportunity may prompt a desire for a hastily organized field trip. When an unanticipated situation arises (and they always do), schools must adjust schedules and routines.

Outsourcing, however, can be an impediment to responding nimbly to altered circumstances. Arranging for a change can be cumbersome or impossible when the management authority is not in the building (or even the same region or state). There’s truth to the old saying that school schedules are dictated more by bus schedules than by educational needs.

The ultimate restriction on flexibility occurs when school districts cannot get out of contracts when they deem it necessary. Consolidating or eliminating bus runs may not be contractually permissible. If a district finds a service is unsatisfactory, whether from poor quality or because it’s too costly, school officials may seek to terminate the contract. However breaking a legal arrangement can be daunting and expensive. The Dayton, Ohio, school district, according to the Dayton Daily News, wanted to get out of a custodial contract that was costing $1 million more than anticipated. Breaking the contract, unfortunately, cost the district $1.5 million.

School leaders frequently need to respond quickly to unanticipated situations. When outsourcing restricts flexibility, it may not be serving the best interest of the students.

Complex Operations
Since the days when a local farmer was paid to transport students to and from school in his hay wagon, outsourcing has been a part of school operations. Outsourcing often can be the most practical and economical way to provide support services to schools — despite the cautions and caveats.

As contractors have become more pervasive, larger and less localized, school administrators are well-served to retain an expert when considering outsourcing. Careful checking of the company’s history and references is essential. Review by the school district’s attorney or a qualified contract attorney is a sound precaution.

As outsourcing firms grow and reach further beyond traditional support services, the sound management of these operations becomes more complex, yet essential. Increasingly, contractors are offering direct instructional services as supplemental providers and through electronic instruction and records management. All of this means bigger challenges, opportunities and risks to school administrators.

William Mathis, former superintendent in Brandon, Vt., is managing director of the Education and the Public Interest Center at the University of Colorado in Boulder. E-mail: wmathis@sover.net. Lorna Jimerson is a board of education member in the Champlain Valley Union High School District in Hinesburg, Vt.