From the May 1998 issue of Entrepreneur

The government's practice of hiring private companies to provide goods and services is as old as the country itself--a little older actually. During the American Revolution, George Washington used private spies and detection services to help defeat the British.

More than 200 years later, everyone from the president of the United States to the mayor of Indianapolis is still following Washington's lead. The Department of Defense, already dependent on private companies, is planning to have outsourcing competitions involving about 150,000 positions over the next six years. Historically, about half the competitions are won by private companies. Big cities, meanwhile, boast big savings--$400 million since 1992 in Indianapolis, $42 million each year in Philadelphia, and $32 million since 1979 in Phoenix--from using private firms rather than in-house staff.

More important, governments are downsizing, and for America's entrepreneurs, opportunities are there for the taking. "It's a wide-open frontier," says Adrian Moore, director of economic studies for the Reason Public Policy Institute, a nonprofit public policy research foundation in Los Angeles.

Jeff Penney, one of five co-owners of DLC Resources Inc., can testify to the profits that exist on that frontier. The Phoenix commercial landscape maintenance company, which now does $5 million a year in sales, attributes one-third of its growth to municipal work. "Obtaining work from the local government is part of our strategic planning," says Penney. "Our experiences dealing with municipalities have been good. More cities are doing privatization than not, and the relationships are good for both parties."

And the overwhelming majority of research supports Penney's claim. Moore points to a National League of Cities survey released last year which found that of the 500 public officials surveyed who had experience with privatization, 74 percent said it was a success. Survey after survey and report after report indicate similar findings--though a few note that privatization, or "contracting out" in government lingo, is not always a panacea for governments. The same can be said for entrepreneurs.

Although increasing numbers of municipalities are contracting out more services, deciding to compete for such work isn't something every entrepreneur should rush into. The cons actually outnumber the pros.


Christopher D. Lancette, a journalist in Atlanta, writes for a number of national and local publications.

The Cons

First, the bad news.

  • Politicians. All smoothly rotating wheels need a little axle grease. In the political world, that means campaign contributions. Frequently, you have to pay to play.

"I called a governor's office about a bid once, and the first thing the secretary asked was if I was on the contributor's list," says Gil Walker, president of GRW Corp., a Brentwood, Tennessee, company with $5 million in annual sales that operates prisons in Kansas, Missouri, New Mexico and Texas.

  • Paperwork. Whether you're doing business with Uncle Sam or local city officials, expect to do it in triplicate. "The biggest problem in dealing with the federal government is the paperwork," says Charles Davis, owner of Support Services Inc. in Cross Hill, South Carolina. "You have to be cautious. Everything has to be filled out exactly right, or you'll be rejected." Davis, whose company manages three rest areas in Georgia, knows whereof he speaks: He spent 19 years working for the federal government before his own job was contracted out.

In addition to the work involved in the bidding, Penney says more ink is also required on the reporting side.

  • Capital. "One issue entrepreneurs have to consider," Moore says, "is the performance bond that municipalities often require in case a company fails to do the job. If someone wants a several-million-dollar bond, that shuts out a lot of small companies, especially start-ups."

Walker cleared that hurdle but not with one easy leap. "I had to finance the company 100 percent on my own," he says. "Banks aren't always interested in lending money to companies, particularly in my business. The big companies are struggling, too."

The Pros

Bad news aside, the good news is clear: There is money to be made. Since contracting out started making headlines in the 1970s, governments have turned to the private sector to help them acquire a better product or deliver a better service, for a cheaper price. The common wisdom among government officials is that much of the public is no longer willing to tolerate tax increases--regardless of what they're for. "We operate in a fish bowl," says Mark Hughes, public information director for Phoenix, where privatization proceeds full steam ahead. "If we don't do the best possible job and provide the best possible services, the public won't be satisfied. And if the public isn't satisfied, they're probably going to vote against the next bond issue. One way or another, they can put us out of business."

Delivering the best service includes virtually everything imaginable--from accounting to zoo management. While many services, such as waste-water treatment and airport management, are enterprises too enormous for small-business owners to tackle, there is an infinite number of projects they can get their hands on. "It's spreading everywhere," says Simon Hakim, a professor of economics and co-director of the Privatization Research Center at Temple University in Philadelphia. "There's probably nothing you can name that someone isn't privatizing somewhere."

"There's no end to the opportunities with the federal government," agrees Davis. "It's the single biggest buyer of services in the world, bar none. If you want to go where the money is, that's where you go."

Other sizable potential payoffs await at the other end of the municipal food chain. Moore says sharp-eyed entrepreneurs are setting their sights on Small Town America. "When you look at cities and states, I would say the overwhelming majority of business is in the small towns," says Moore, whose institute produces periodic reports and newsletters on privatization. "There's a lot more going on in towns with less than 50,000 people. I think you'll find huge potential there."

What's more, this potential seems ideally suited for small businesses. "The most common complaint I hear from officials in small city governments is that they can't find enough bidders," says Moore. "I get calls from [officials] all the time saying the big companies don't want to bother with them."

Another advantage for business owners dealing with smaller cities is the lack of union opposition. "Politics at the big-city level tend to be dominated by unions and special interests," Moore says. "It takes too much for a company to even get a bid in at that level. In small cities, it's just about business."

Still, many large cities and counties have had great success with privatization. Under the leadership of current Mayor Stephen Goldsmith, Indianapolis has reduced its annual budget by $31 million--and lowered the tax rate three times since 1992. Philadelphia contracted out 46 activities from 1992 through 1997. Phoenix put its solid waste operations out to bid, and Mecklenburg County, North Carolina, has privatized everything from the management of a tennis complex to substance abuse recovery programs--totaling $85.7 million of annual services, or about 15 percent of its budget as of 1996.

Thou Shalt . . .

To get in on the action, entrepreneurs should follow the four commandments of privatization:

1. Do your homework. Davis, Penney and Walker say bidding for a service can be a complicated endeavor--especially if the municipality doesn't provide interested parties with a detailed analysis of the service up for bid. (Fortunately, most do provide such information.)

"You have to know the full scope of your work and how much it's going to cost you," Penney says. "There's definitely a learning curve with bidding."

2. Open your own doors. One problem for savvy entrepreneurs looking for information on privatization is the lack of places from which they can get it. That creates the second commandment, the one that separates the successes from the still-out-wandering.

"If you wait 'til the RFP [request for proposal] comes out, you've probably already missed the deal," Walker says. "You need to have face-to-face meetings with department heads so they can get to know you. Your chances are enhanced if they do."

"At the small-city level, legwork becomes an issue," says Moore. "Go from town to town and meet with city managers. Tell them what you can offer and ask if they've thought about contracting that out. It may not get you the contract immediately, but it can get them to open up bids. A lot of business is drummed up that way."

3. Be innovative. Gary Jensen says finding a new way to accomplish something can give an entrepreneur an edge. "Do some innovative things municipalities don't do," says Jensen, owner and president of American Emergency Service Corp., a fire protection provider in Wheaton, Illinois, with annual sales of $1 million. "We build and rebuild our own fire trucks. Trucks are very expensive and complicated--and we save money by creating our own facilities to do the work."

Prison manager Walker says innovation pays extra dividends in his business--one in which he's responsible for the lives of many people. At his Texas facility for female inmates, Walker has a special program for families. "Once a quarter, we have a sleepover," he says. "Families can bring a sleeping bag and videos and stay the night."

In Phoenix, city officials once considered closing a landfill that had reached capacity, until a private company found new ways to compact garbage and keep the landfill open longer than expected.

4. Specialize. Small-business owners shouldn't gobble up every opportunity they can find. "They have to find the right jobs," Penney says. "And the more they specialize, the more cost-effective they can be."

Penney and others warn it's easy to get in over your head, so it's crucial to know your limits. "We found our niche--public right-of-ways, landscaped areas by freeways, tree care," Penney says. "We can't, for example, [landscape] an apartment complex. We do well with contracts that are about $10,000 a month. When it gets down to $2,000, we can't be competitive."

Entrepreneurs who assess the pros and cons and follow these commandments can become part of America's economic history. And, with the federal government even privatizing parts of the space program, it's obvious the practice will extend far into the future.

Contact Sources

American Emergency Service Corp., (847) 364-7163, fax: (847) 364-9746

Commerce Business Daily, (202) 512-1800

DLC Resources, fax: (602) 243-5575

GRW Corp., (615) 373-5703, fax: (615) 373-0224

Reason Public Policy Institute, (310) 391-2245, http://www.reason.org

Temple University's Privatization Research Center, http://www.temple.edu/prc