Outsourcing: Two Case Studies from the Victorian Public Hospital Sector

By Young, Suzanne | Australian Health Review, February 2007 | Go to article overview
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Outsourcing: Two Case Studies from the Victorian Public Hospital Sector

Young, Suzanne, Australian Health Review


Outsourcing was one process of privatisation used in the Victorian public health sector in the 1990s. However it was used to varying degrees and across a variety of different services. This paper attempts to answer the questions: Why have managers outsourced? What have managers considered when they have decided to outsource? The research was carried out in a rural hospital and a metropolitan network in Victoria. The key findings highlight the factors that decision makers considered to be important and those that led to negative outcomes. Economic factors, such as frequency of exchange, length of relationships between the parties, and information availability, were often ignored. However, other factors such as outcome measurability, technology, risk, labour market characteristics and goal conflict, and political factors such as relative power of management over labour were often perceived as important in the decision-making process. Negative outcomes from outsourcing were due to the short length of relationships and accompanying difficulties with trust, commitment and loyalty; poor quality; and excessive monitoring and the measurement of outcomes.

Aust Health Rev 2007: 31(1): 140-149

THROUGHOUT THE 1990S, outsourcing, market testing and structural change occurred in the Victorian public health sector as part of the privatisation agenda. Managers displayed agency in their decisions, and the use of outsourcing was varied. A case study method was used to explore the outsourcing decision in the public sector in a rural hospital and a metropolitan network. Multiple case design was chosen to provide an analysis which might produce similar or contrasting results.1,2 The information was pooled across the health organisation, enabling multiple outsourcing decisions to enhance the analysis. Interpretative measures were used to provide insight into the question: Why outsource? Interpretivism "stresses the subjective aspects of human activity by focusing on the meaning rather than measurement of social phenomena"3 and is appropriate in situations where real-life experiences are studied by participation in order to better understand and express their values, details and features.4

Initially, interviews were conducted with the Chief Executive Officers of the organisations, using semi- and unstructured questions to ascertain the reasons for, extent of, and processes used in outsourced and non-outsourced areas. Further interviews with decision makers and staff in these respective areas were then conducted. Interviews were held over a 2-year period, covering all levels of hospital management, as well as proprietors and staff of the outsourced areas, and union officials.

The research does not attempt to weight the respective outsourcing reasons, but rather assumes that they are interlinked. Furthermore, it does not objectively measure the outcomes of outsourcing, but, rather, proposes a framework to assist decision makers and researchers uncover the reasons for outsourcing.

Reasons for outsourcing

As has been reported previously,5,6,7 the theoretical and empirical outsourcing literature identifies six reasons for outsourcing:

* to reduce costs;

* to focus on core competitive advantage;

* to introduce workforce flexibility;

* to manage industrial relations problems and the associated increase in the power of management over labour;

* to satisfy personal objectives; and

* to shape public sector agencies to align with the agenda of the government providing the funding.

Box 1 summarises these reasons for outsourcing and lists the factors that the literature sees as important for the decision to be successful.

In making an outsourcing decision the theories suggest that the factors surrounding the decision will either advance or hinder the outcomes. These factors are listed in Box 2, and show when outsourcing or internal production are favoured.

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