Privatizating some university services can be a good way to save money when it's done correctly, a consultant told the UNC system Board of Governors Friday.
The consultant's interim report summarizes current use of outside contractors by UNC system schools, examines experience with privatization across the country and suggests a process and timetable that could be used to implement privatization.
The report on potential cost savings through privatization is being prepared in response to a General Assembly mandate. A final report will come to the board for a vote April 12, with an April 15 deadline for delivery to the legislature.
Before completion of the final report, consultants plan to collect costs related to various university functions and to seek vendors' estimates for what they might charge to take over those functions.
William McCoy, UNC system vice president for finance, told the board that looking at privatization was worthwhile.
"We feel this is an appropriate thing for the university to do as good stewards of the resources given to us by the legislature and the people of the state," he said. "At the same time, we are aware this is a sensitive subject and hopefully we are conducting the study in a way that reflects that sensitivity."
The final report will identify specific areas in which privatization is likely to result in cost savings, McCoy said.
Privatization as one tool
Ken Boutwell of the consulting firm MGT of America, Inc., told the board he hoped the UNC system would have flexibility in using privatization, which also is called outsourcing. It should be considered as one of several options that could be used to save money or to provide better services, he said.
"Privatization alone is not enough," he said.
Before any function is privatized, employees should be given a chance to demonstrate they could perform the service at the same cost as an outside vendor, he said. Institutions also should be allowed to examine whether savings could be achieved through re-engineering work processes or by introducing new technology.
One concept, the in-house vendor, is gaining popularity around the country, Boutwell said. In such a relationship, an organization that provides a service becomes a unit that receives no subsidies other than what it charges for its services. Users of the unit's services are allowed to contract with outside vendors, thereby forcing the unit to offer competitive services and costs, Boutwell said.
Also, for a wide variety of reasons, individual campuses should have the flexibility to decide for which services to seek outside contracts, he said.
Some geographic areas may not have vendors who could supply certain services, he said. And, even if it costs more, institutions may have good reasons to keep direct control of certain services, he said. His report cited such reasons as security concerns, loss of supervisory control, possible negative impact on the local economy, and possible increased liability and financial risks.
Institutions also should have the flexibility, depending on local markets, to decide which specific functions should be privatized, Boutwell said. For example, rather than being told all of groundskeeping should be privatized, institutions could contract for certain areas of groundskeeping, such as tree-trimming, mowing or landscape design, he said.
Employees' concerns
Boutwell said discussion of privatization often caused anxiety among employees who were concerned about losing their jobs. But mass loss of jobs has not been the experience when services are privatized, he said.
He cited a 1989 survey of 34 city and county governments around the country that found of the 2,213 workers affected when services were privatized, 7 percent lost their jobs. Fifty-eight percent of the employees went to work for the private contractor, 24 percent transferred to another government job and another 7 percent retired, he said.
Private contractors offer some advantages for workers, Boutwell and McCoy said. Boutwell said they typically had very strong training programs. McCoy cited a management consultant who said employees who go to work for vendors often find greater satisfaction because of an increased ability to move to higher levels of the organization.
"If you're in the mainstream of an organization there's a better chance for rewards," McCoy said. "A housekeeper could aspire to be a vice president of his company, but couldn't ever be head of a university or a dean."
Privatization already being used
Boutwell said a survey found UNC system schools spend at least $90 million annually for services provided by outside contractors.
Board member Jim Holshouser said, "I think folks in the legislature will be stunned to learn there's $90 million in contracts out there."
Carolina led the system with vendor contracts totaling $37 million, a figure that did not include the contract for the Carolina Inn operation.
Across the system, contracts for repairs and maintenance accounted for 21 percent of the number of contracts; followed by professional services, such as architectural and legal, at 13 percent.
UNC system institutions reported that of the 294 contracts described in the survey, 73 resulted in monetary savings estimated at $7.6 million. Of that amount, about 12 percent of the savings was attributable to lower wages and benefits.
Boutwell said the institutions reported widespread satisfaction with their experience in contracting for services. In a survey of the people who oversee individual vendor contracts, 54 percent said they were satisfied and 43 percent were very satisfied, he said.
"With some exceptions, once an institution has outsourced they are very pleased with the results," Boutwell said.
A how-to guide
Boutwell presented the board some guidelines for how campuses could examine the possible benefits of privatization and how to implement it.
Institutions should expect to take 18 months to study and implement a privatization project, he said. The time would be used to develop a privatization procedure plan, develop criteria for choosing what services should be privatized, choose services for privatization, assess the impact on employees and the institution, prepare a transition plan, advertise for contract bids, negotiate with the selected vendor and begin the contract.
Boutwell said the UNC system faced two barriers to privatization. Under current law, he said, campuses cannot sell their equipment to companies that win a contract to perform a service. Unless the law is changed, campuses will face the costs of losing the equipment and for shipping it to the state surplus agency in Raleigh. Also, campuses will need to pay for severance packages for some departing employees.
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