Cost savings in contracting out when a contract fails: some Australian evidence

Abstract

Literature on contracting out in public sector contexts reports cost savings as the main driver behind contracting-out decisions. Few studies have examined the post contract realised cost savings. This study reports the findings of a case study of a public sector organisation which experienced an insourcing-outsourcing-insourcing loop in a contracting-out situation. Comparisons of pre-contract cost savings estimates and post contract realised cost savings are made to appraise the impact of the cost savings argument behind a contracting-out decision. The study finds that failure to achieve estimated cost savings due to contract failure may impose huge penalty on an organisation; realised cost savings are different from estimated savings, the difference between the realised and estimated cost savings is even greater if an organisation falls within the vicious circle of an insourcing-outsourcing-insourcing loop. The findings provide an insight into capturing the cost of non-financial information, cost of contract failure, used in contracting- out decisions.