Strategic contracting in local government

Strategic contracting in local government:
the case of Graested-Gilleleje in Denmark
The local government in Graested-Gilleleje (GG) in Denmark embarked on a strategy for
contracting for public services in the early 1990s. The impetus was both to deliver better
and less costly services, and also to look for new and alternative ways of delivering
public services. One of the key means GG used was to invite (in 1992) and involve
private providers to deliver public services. The local government enjoyed a liberalconservative majority in the city council. The political backing for the project was
secured. The mayor was one of a limited number of local governments in Denmark at the
time that found it interesting to try out alternative service delivery mechanisms. The city
council had employed an active chief administrative officer (CAO). He had a political
science degree from a university in Denmark, and he was keen on inducing change into
the organization of public service delivery.
At the beginning of the project, the local government tried to establish a public–
private partnership with a private company – Scancare. The private company was a
subsidiary of two larger, Danish-based multinational companies – Falck and ISS. The
multinational companies wanted to achieve new markets in the public sector, and went
along with the idea. A good dialogue was established between the private company and
the local government about possible private service delivery in the future. Soon, however,
the company and the local government found out that the contracting out situation would
demand that the private sector organization be independent of local government. The
close public–private partnership that had been developed was an impediment to the
contracting out process ahead. After that the private company withdrew its initial interest
in the original project.
CONTRACTING OUT FOR PUBLIC SERVICES IN LOCAL
GOVERNMENT
The local government went ahead with the project of contracting out welfare services.
The first service was elderly care. The local government wanted to contract out elderly
care in part to private companies. The city council had initiated an investigation into the
pros and cons of contracting out in 1994 which was done in connection with the private
sector company involved. The report was made public in 1995 – after the private sector
company had withdrawn from its close cooperation with the local government. The report
was entitled ‘The future elderly service delivery – a proposal for private sector
involvement’.
The proposal raised a storm of protests. There was an outcry among public employees
already working with the elderly. There were also protests among citizens in the local
government. The unions also mobilized against the effort.
The local government decided to take up the challenge and to proceed with the
contracting out policy. The local government leadership could rest assured that they were
on the right track and would not face much opposition. First, the mayor held a secure
majority in the city council. There was little chance that the mayor would be ousted in the
next local election. Second, the management of the local government was eager to
proceed with new public management reforms. The local government was already
picking up an image of being an innovative local government that was prepared to take
risks and try something new in public service delivery. Therefore, the protests were
foreseeable, but would not stand in the way of the experiment about to take place. In
national politics, there had been pressure since the 1980s to adopt market-type
mechanisms in the delivery of public services.
FIRST ROUND OF CONTRACTING FOR PUBLIC SERVICE
The first contracting out process was carried out in 1996. The result was that the local
government contracted out part of the provision of elderly services to a Swedish-based
private company called Curatus. Elderly services involve running homes for the elderly
and helping elderly people in their homes. A remaining part of the service delivery was
kept in-house as a check on the private provider. The aim, however, was clear: to allow
the private sector companies to take over as much as possible gradually to enable the
local government to concentrate on being a smart buyer.
The local government worked hard at implementing the project. There were several
factors influencing the implementation. First, widespread public attention was given to
the project: the employees, citizens and the media watched the project’s implementation
closely. National politicians were also showing interest in whether or not the local
government achieved progress with contracting out. Second, the local government had to
cope with discussions on the rules and regulation surrounding contracting out. What was
allowed and what was not allowed was up for discussion constantly. The local
government was pushing new boundaries in contracting out services so closely connected
with the welfare state.
In the end, the first round of contracting out went well. Services were delivered.
Targets were met. Despite intensive media coverage, the project was not hampered by
any scandals or failures in service delivery that are sometimes experienced in these kinds
of high-profile exercises.
SECOND ROUND OF CONTRACTING FOR PUBLIC SERVICES
The relative success of the first period made the local government hungry for more. The
local government initiated a new contracting out tender in order to contract out the whole
of the elderly service delivery to private sector providers. The purposes of contracting out
were described as quality development of services, consumer choice between two
providers, quality competition between providers, human resources systems and social
clauses in top-class, economic advantages, to prevent a monopoly situation, and to
specify a contracting structure that maximizes possibilities for designing the optimal
organizational solution.
A long and detailed document on the conditions for tendering was issued which would
form the basis for the contract. The new model of contracting out a whole policy area to
private providers was described. The call for tenders was issued in 1999. In 2000, three
private providers were chosen. They were a Swedish-based company (Partena) and two
Danish-based companies (SeniorCare and Senior-Service, Denmark). Senior-Service was
formerly known as Curatus, but is now under new management. The private providers
delivered services at four elderly centres within the local government district. Partena
Care had responsibility for two elderly centres. In addition to those, elderly citizens were
able to choose services from a number of smaller providers for selected, specialized
services. There were approximately 740 users to whom the private providers delivered
services.
The local government was reorganized to be better equipped to handle contractual
relations with three private providers. The purchaser function was organized centrally. It
was called ‘Elderly service, visitation and purchasing’. The purchaser function was
accountable to the Select Committee for Elderly Services within the city council. Users in
their own homes were able to choose from a menu of services: personal care, care-related
tasks, cleaning and practical help, and add-on services for which they paid. The main
organization principle was to put the citizen (or the customer) at the centre. The core
values pursued were self-determination, individualism and safeness.
The contract was divided into different sub-agreements. One agreement concerned
‘help in the elderly’s own home’. A second agreement concerned the daily operations of
the elderly centres (which again were divided into subgroups such as personal care,
cleaning, training and so on). A third agreement concerned laundry. A fourth agreement
concerned food. A fifth agreement concerned development, which had the objectives of
furthering effectivness and user satisfaction. This part of the contract emphasized that
personnel had to be motivated and aware of what quality is. Thereby, there were big
ambitions tied to developing human resources throughout the contracting period. The
contract also had a clause on corporate social responsibility (CSR). The clause calls for
private providers – without reimbursement – to take on a social responsibility, for
example, by giving the unemployed a chance to do job-training.
Coordination between the purchaser and the provider was also written into the
contract. As a minimum, the purchaser undertakes that an annual meeting will be held in
order to discuss general questions and developments. More meetings in the period
leading up to the start of the contracting period are expected. The local government
implemented a new information technology system at the time which was developed in
cooperation with another private sector IT company. In the contract, the purchaser
demands that the private service providers will integrate the purchaser’s IT systems in the
registration of the services delivered to citizens. This also encompassed use of handheld
PalmPilots in registration and which were novel and innovative at the time. The local
government made the IT systems available to the providers without charge.
Control and accountability systems were put in place from the beginning of the
contract period. In the contract, it is emphasized that the local government as a purchaser
expects problems to be solved through dialogue and by preventing problems from
happening in the first place. Control meetings are scheduled on a fortnightly basis
between the purchaser and the provider. A purchaser representative will be present
physically at the elderly centre for at least three hours a week. There has to be an office
available to the purchaser representative, and a mailbox. The purpose of the control is to
set up a dialogue forum between (1) the users, (2) the relatives, and the (3) staff of the
provider.
A ‘traffic-light’ control system was also established in the contracts. If a complaint is
filed, the purchaser expects the provider to correct the matter within seven days (‘green
light’). If the purchaser notes that misconduct has taken place, the purchaser issues a
warning that has to be dealt with within two days (‘yellow procedure’). If gross
misconduct is found, the provider must reply in writing within 12 hours (‘red
procedure’). Quality of services is described in three ways: (1) the user/customer’s own
experience of quality; (2) the checkable quality related to performance indicators, and (3)
the described quality. Performance indicators are used in four ways: (1) amount of
personnel per user per day/week; (2) time of delivery of service in relation to agreed
time; (3) amount of delivered services in relation to required services, and (4) number of
yellow/red warnings and procedures. The registration was carried out regularly and
summoned by the end of each month. Besides this quality control, providers are
encouraged to apply their own quality control system to the GG local government. The
programme is regarded by the local government in isolation and is not integrated into the
local government’s own quality assurance programme.
If the contract is not held, the purchaser will seek negotiations between the purchaser
and the provider. A neutral third-party arbitrator is appointed in common cause between
the purchaser and the provider to settle differences. The purchaser and provider will split
the cost of hiring the arbitrator. If differences cannot be settled, the matter will go to
court. In the last part of the contract, GG notes that any change in level of service will be
communicated six months in advance.
The contract was renewed in 2004. The local government decided to carry on with the
contracting out project. Private providers are still responsible for delivering public
services today. The city council still has the same majority. Both the mayor and the CAO
still have their jobs. Citizen satisfaction has been stable throughout the period. The media
has stopped reporting intensively. The GG model has been copied by other local
governments in Denmark. GG has visitors from many parts of the globe in order to study
its model. In 2007, as part of a new structural reform in Denmark, GG local government
has joined forces with the neighbouring local government. The use of new public
management models and contracting out in particular is set to continue.
CONCLUDING REMARKS
The case of GG highlights several issues in the contracting for public services model
introduced in the first part of this book. The political conditions surrounding the project
were stable. The mayor enjoyed a comfortable majority throughout the period. There was
enough time and space to describe the targets and formulate the policy goals. There was
no hurry in drawing up contracts in the first place. The local government made an effort
to collect material to understand the process and implications of contracting in the best
possible way. GG sought to establish a close connection with the private sector early on.
A public–private partnership was underway and was almost established formally, but the
degree competition made the furthering of the original public–private partnership
between the local government and just one selected firm impossible. GG went ahead
gradually. Only part of the elderly services was contracted out in the first period. The
local government tackled the media and the public from the beginning. Although there
were protests, the local government tried to get its way. It did not allow the protest to
overwhelm the whole project. The project still went ahead. Protesters at the time – both
employees and citizens – might say that they were being sidelined. The first period was
used to collect evidence and gather experience about contracting. When the time was
ready (i.e. when a new contract period was approaching), the local government took the
next step, and wanted to contract out all of the elderly services to private companies. The
local government managed to get enough companies interested in the bid. Three private
providers were awarded the contracts in 2000. By that time, the local government had
reorganized its own operations to be better prepared to deal organizationally and
managerially with the contractual relationship with the providers (where one was known
from the previous period, and the other two were new).
Throughout the period, both the mayor and the CAO had known where they wanted to
go. The goal was to get better services for citizens, but also to try to involve private
providers in the delivery of public services. This strategy has succeeded. Throughout the
period, there has also been a constant focus on communication. The focus has been on
communication both with the media, and with the key stakeholders more specifically.
Private providers have been interested in winning contracts in this local government. The
private providers have agreed to the terms set by the purchaser.
At the same time, the contracting for public service in GG has been unusual in some
aspects. It was one of the pioneer local governments in Denmark to conduct experiments
with contracting out and other alternative service delivery mechanisms. The institutional
rules and norms were not entirely in place when GG began. This both gave the local
government an advantage because it could pursue new strategies, but it could also be a
disadvantage because all media eyes were on the activities of the local government. The
local government had a consistent political and managerial leadership throughout the
period which allowed for stable progression in the strategy.
DISCUSSION QUESTIONS
1 How is Graested-Gilleleje’s contracting experience an example of strategic contracting?
2 In what ways did the institutional context that Graested-Gilleleje was in shape the
strategy?
3 Who is dominating the relationship? The purchasers or the providers – or do they
appear to have constructed a real dialogue?
4 How do you rate the accountability structure for Graested-Gilleleje’s contractual
relationships?
5 Was the gradual strategy necessary – or should GG have gone for the quick change in
the beginning?
REFERENCES
Andersen, N.Å. (1995) Udlicitering. Copenhagen: Nyt fra samfundsvidenskaberne.
Fuglsang, M. and Midjord, C. (1995) Udlicitering af ældreområdet. Græsted-Gilleleje som
eksempel, in C. Greve (ed.) Privatisering, selskabsdannelser og udlicitering. Aarhus: Systime,
pp. 136–157.
Graested-Gilleleje homepage: http://www.ggk.dk/ (from 1 January 2007 the local government has
merged with another local government in a new Gribskov local government; see
http://www.gribskov.dk/.
Graested-Gilleleje (2000) Tendering material for the contracts for elderly care.
Hegnsvad, M. (2001) Udlicitering kræver styring og ledelse, in S. Hildebrandt and K.K. Klausen
(eds) Offentlig ledelse på dagsordenen. Copenhagen: Børsen Publishing, pp. 85–104.