Outsourcing in a rapidly changing transportation industry

By Linda Watson, Watson Consulting, and Sandy Freeman, RATP Dev USA

Outsourcing of public transit services is becoming more common as transit agencies wrestle with myriad financial issues, market forces and technology changes. This is not a new trend; approximately 61 percent of the 463 transit agencies that responded to a 2013 U.S. Government Accountability Office (GAO) survey, GAO-13-782, indicated they contract out some or all of their operations. It’s natural to wonder if outsourcing is a viable option for your system. So, whether you are considering this move, or simply want to understand the business model, there are many things to think about.

No matter the type of service – whether fixed route, demand response, or paratransit that complies with the Americans with Disabilities Act – the most common reasons agencies choose to outsource are to reduce costs, start up a new service, increase operating efficiency and provide more flexible service to passengers.

It’s important to realize that outsourcing does not have to be an either/or proposition. Some agencies outsource their entire operations, some outsource specific functions, or even specific routes, and some choose not to outsource at all.

Outsourcing: a quick breakdown

In general, transit agencies typically retain control of “big-picture” functions such as long-range planning, capital planning, and contract oversight. Two of the most common outsourcing models are “agency performed” and “contract out.” The first is when the agency performs the delivery of service by hiring employees directly. This is often referred to as “in-house.” “Contract out” outsourcing is when the agency competitively procures the delivery of transit service and associated functions (service planning, marketing, finance, customer service, and safety/security) with private contractors. The contractor manages all aspects of transit services, including administration.

What to outsource?

You can partner with a service provider on virtually any aspect of your operations, but there are some departments you may decide you want to keep in-house, such as owning your fleet. Purchasing vehicles is costly and could deter qualified proposers from competing for a contract, particularly if the contract duration is short. Also, in the event a transit agency needs to terminate a contract, vehicle ownership gives an agency more flexibility when choosing a new provider. Finally, agencies that own their own fleets can control their own repair and replacement schedules.

Most local agencies already have fully functioning routes and schedules that they want to maintain, so they choose to remain in control of route and schedule planning. They look to the private contractor to handle service planning, on-time performance tracking and route adjustments.

Marketing and customer service support vary greatly across agencies. Some agencies have full in-house departments dedicated to supporting these crucial business elements or have contracts for these services, while some agencies have very limited marketing resources or customer service assistance. Agencies looking for support in these areas should clearly identify their needs when soliciting proposals and should examine the potential contractor’s scope of experience and expertise in these areas.

Procurement

Once you decide what to outsource and what to retain ownership of, you can begin the procurement process. Complete a detailed cost analysis of current operations (including a route level assessment) to help determine if those services can be performed more efficiently. This includes incorporating information from similar agencies that contract for service and making comparisons between the systems.

Before putting out the call for proposals, determine the cost of your current services so you can use that as a baseline when factoring the prices each private contractor submits. Set realistic expectations for contracting and establish a competitive procurement process that invites high-quality proposals and screens out unqualified contractors.

Before choosing a private contractor from those who submitted proposals, you may find it helpful to:

  1. Consult with other agencies or peers to learn more about the potential companies bidding for the contract.
  2. Look for stability in the management team (changes in personnel can affect whether the contracting experience is positive or negative).
  3. Use a two-phase process for selecting a contractor. First, evaluate proposer qualifications and capabilities, then evaluate prices to make sure they are realistic.

If you select a contractor, it’s important to continuously monitor contract performance. Hold the contractor responsible for meeting agreed-upon standards and have a mechanism for making changes in contract terms in the event that circumstances or needs change.

Potential benefits

Although each system is different, there are potential benefits of outsourcing. This can include decreasing the cost of providing service, improving labor relationships, gaining the ability to get a new service up and running more quickly, and raising the overall rider experience, which will draw more people to their mass transit options.

Another potential benefit has to do with the connections of your contractor. Many private contractors can achieve cost savings through economies of scale. For example, they can develop a comprehensive training or maintenance program that can be adapted to fit any agency, and they can purchase commonly-used items such as fuel, vehicle parts and equipment at lower rates due to their enhanced bargaining power. You can leverage key business relationships the contractor may have in place. Lastly, experience and expertise, although intangible, provide private contractors with a wealth of knowledge they can rely on to quickly identify and correct inefficiencies.

It’s important that you weigh the potential benefits of outsourcing with whatever concerns you may have. Some agencies determine that the economic benefit of doing so does not outweigh the risk of delegating responsibility of the system to an outside party. Others worry they may need to employ additional staff to supervise the terms specified in the contract, resulting in expenditures that could exceed cost savings.

Whether you decide to outsource some subset of your functions, specific zones or routes or 100 percent of your operations, finding a trusted, experienced and knowledgeable partner can help an agency provide improved, safe and efficient transportation to the riding public.

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