Contracting Out and Organizational Learning in the Public Sector

A key characteristic in the development of the public sector in the last 30 years is the expansion of engagement between public and private organizations in searches of improvement of public sector performance. Enhancement of competition has in the public administration literature been seen as the key driver for improvement. However, it is a long-standing and well-proven hypothesis in the organizational literature that organizations can also improve their functioning and performance by learning from engagement with other organizations in their environments. Yet, little is known about whether and how engagements between private and public organizations may lead to improvements in the public sector as a result of organizational learning. In this study, we propose and test the main hypothesis that engagements with private organizations through the use of contracting out facilitates organizational learning in the public sector. We review the scarce literature and elaborate a set of hypotheses concerning how different ways to organize contracting out may be related to organizational learning. Empirically we test these hypotheses on the case of contracting out technical services (park- and road maintenance) in local governments in Denmark, England, Norway and Sweden. We find that contracting out tends to enhance organizational learning in public organizations. Our findings also suggest variation in the impact depending on different ways of organizing and managing contractual relations. Emphasis on a ‘hard’ contract management style tends to diminish organizational learning while emphasis on collaborative governance, greater formalization of contractual relations, larger contract management capacities, and emphasis on learning intends all enhances organizational learning. We discuss the implications of our findings and suggest a paradox of contracting out.