Home guard

Michael Mensik and Peter George report on how US government agencies are following the trend for ‘offshoring’

In testifying before the US House of Representatives Committee on Small Business on 18 June, Paul Almeida, president of the department for professional employees at the American Federation of Labour – Congress of Industrial Organisations, called on policymakers to recognise the “alarming” and “accelerating” trend of “offshoring” white collar and IT jobs.

“Technology companies,” he stated, “are laying off American workers from high-paying desirable jobs, while they add thousands of jobs overseas… Some local and state governments have even begun to outsource administrative jobs, which is an outrageous misuse of taxpayers’ dollars.”

In response, state legislatures in Connecticut, Maryland, Missouri, New Jersey, Rhode Island and Washington DC are reportedly considering laws that would effectively restrain offshoring by regulating the ‘privatisation’ of state services more heavily. Some state legislators are also seeking to ensure greater transparency and openness on the part of private companies that outsource business functions.

A New Jersey bill would require call centre operators to identify themselves, their employers and their locations on any inbound calls. “Customers have a right to know who is answering their call and where that person is located,” said Almeida. “Just as they have a right to know the ingredients in a box of cereal.”

The New Jersey legislature is considering several bills. These would establish various procedural and substantive requirements that any state or county agency would have to meet when contracting a private enterprise to provide services “substantially similar” to those previously provided by state or county agency employees.
These bills do not distinguish between in-state or out-of-state contractors, but what they would require is that, before soliciting any bid to privatise government services, the agency would be required to prepare a statement that specifies the contract requirements, the procedures for awarding the contract and the services subject to the contract. The agency would also need to state the wages and benefits of the agency employees currently performing the work and the “anticipated net reduction of in-house costs”.

Upon selecting a contractor for a privatisation contract with a value of more than $250,000 (£157,000), the agency would be required to undertake two more steps. These would be a cost analysis of the contract and a certification that the contract complies with the substantive requirements of the law. Both documents would be made available publicly and any member of the public could submit comments and request a public hearing. A hearing would be mandatory if requested by any union representing affected employees.

Any privatisation contract with a value of more than $250,000 would have to satisfy numerous substantive requirements. The contract term must not exceed three years and the contract must result in “substantial aggregate cost savings” that are not outweighed by “the public’s interest in having [the] particular function performed directly by the [state or county]”. Staffing levels must be kept at the level needed to sustain the quality of service. The contractor must meet all applicable non-discrimination and affirmative action standards and it must provide workers with benefits and pay not less than that provided to state or county employees performing the work. Any displaced state or county workers must be given a “right of first refusal” for jobs under the contract, or training and other assistance if they choose not to work under the contract. In addition, if the contract provides for “services to create, develop, enhance or update a data-processing system or other system based on information technology,” the contractor must involve state or county employees at all stages of the work to ensure that their skills have been upgraded sufficiently.

In Rhode Island, the legislature is considering a bill that state agencies would have to follow when contracting a private enterprise to provide services similar to those previously provided by state employees. In this case, the legislature only applies if the contract has a value of $750,000 (£472,000) or more; and unlike in New Jersey, no similar bill regulating county agencies has been introduced.
The Rhode Island bill also expressly excludes any “agreement to provide legal or management consulting only”.

Under the bill, an agency could not privatise a government service unless, in consultation with the Department of Administrative Services (DAS), it first “prepares an analysis of the costs and benefits to the agency of privatising services, and continuing to provide such services through employees of the agency”.

The analysis must examine costs and quality and, if it favours privatisation, the agency must take additional steps. It must prepare a statement of the services, specifying quantity and quality, and a written estimate of the most efficient costs of having state employees provide the same quality of services. It must solicit competitive bids and help agency employees submit a competitive bid, if they so desire. Bids should include the wage rates that will be payed for each post, and bidders have to offer available posts to qualified agency employees. The agency must certify with the DAS commissioner specific compliance issues to the state auditors, including projected cost savings of at least 10 per cent. The state auditors must then approve the privatisation contract, and any contract valued at $5m (£3.1m) or more would also require the approval of state legislature. In no event could the privatisation contract have a term exceeding seven years.

The Connecticut legislature is considering a bill that is virtually identical to the Rhode Island bill, but one key difference is that the Connecticut bill limits the term of the privatisation contract to five years.

More than 200 years ago, the Scottish economist Adam Smith proclaimed the principle of the “invisible hand”. He said that every individual in pursuing their own good is led, as if by an invisible hand, to achieve the best good for all, and any interference with free competition by government is almost certain to be injurious. But, when formulating this idea, Smith did not foresee the internet – his “invisible hand” encountered many physical and other barriers that no longer exist for various productive activities and functions.

Today, more than ever, enterprises want to focus on their core competence and outsource non-core functions to others that can discharge those functions more efficiently. The internet, digitisation, better education and other factors allow many of these functions to be moved across the globe with little or no adverse impact on service levels. In contrast, the human consequences of such shifts can be sudden and substantial. Some find them unacceptable and call for government intervention, despite Smith’s teachings.

The Connecticut, New Jersey and Rhode Island bills are examples of such intervention. Some commentators believe that these privatisation bills, if enacted into law, will have little impact on offshoring, given the limited number of contracts offered by state government. But most agree that lobbying efforts and public pressure to legislate against offshoring are likely to continue, at least while the economy remains flat.

Michael Mensik is a partner and Peter George a senior associate at Baker & McKenzie in Chicago