Governance of outsourcing and contractual relationships

Many public sector organizations (PSOs) rely on outsourcing as a way to increase their “value for money” in the provision of public services (Broadbent and Guthrie, 2008). As a result, the topic of outsourcing has been addressed with some regularity in the public management literature for many years. Increasingly, attention is being directed toward the nature of the risk associated with an outsourced activity, and the resulting implications for a PSO’s managers. In this chapter, we present a framework that PSO managers can use to assess the nature of the risk they face in an outsourcing decision, and juxtapose it with alternative governance models. We argue that, as the risk associated with an outsourced service increases, so too does the sophistication of the governance model a PSO needs to use to manage it. Thus, the decision to outsource a high-risk service must depend, in part, on whether the PSO has the capability to use the requisite governance model. We begin by discussing the roots of outsourcing, with a particular focus on Considine’s (1999; 2001; 2003) Four-Governance Model framework. We assess his framework in light of our empirical research in Italian PSOs that led to our model for assessing outsourcing risk, and we argue that a PSO does not need to have a single governance model, nor even a highly sophisticated one. Rather, it may need several governance models operating simultaneously, each attuned to the risk associated with the outsourced service being managed