Business Commons^™

Contracting Out And The Price Of Burning Bridges, D. J. Johnstone

Faculty of Business - Accounting & Finance Working Papers

The outsourcing of government activities is justified primarily on the grounds of cost savings. In the process of determining whether there are potential savings from contracting out, government agencies are required by various Commonwealth and State Government guidelines to measure the relevant costs of in-house activities and to compare these with external bids. The cost comparison methodology advocated in these guidelines is flawed in that it makes no alIowance for the financial value of the option to contract out (and thus not to contract out). It is wrong to give up (exercise) this option unless the expected cost savings accruing …