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In-house firms less efficient than private firms – study
Two university studies show that private companies manage their labour costs better and are significantly more cost-effective than in-house firms.
Two studies at the University of Jyväskylä investigated cost-effectiveness and performance in publicly owned in-house companies compared to privately owned companies. The studies analysed and compared companies’ financial performance and tried to identify possible differences in cost effectiveness and productivity. In addition, they evaluated the impact of privatization on operational efficiency.
The state or a municipality can buy from an in-house company within the limits set by procurement legislation without a competitive tender. Normally, all procurements over €60,000 must be put out to competitive tender.
In-house company
An in-house company is one owned by the public sector, such as a municipality or the state, which primarily provides services for its owners.
Procurement legislation allows owners to make purchases from in-house companies without competitive public tendering.
The Finnish public sector buys approximately €45 billion of goods and services annually, of which the share from in-house companies is significant.
Private firms manage labour costs better
The results of the study indicate that private companies manage their labour costs better than their in-house counterparts. Private companies are also more productive.
“Our study examined the cost and invoicing structure of a particular in-house company and compared it with a private accounting firm which had bought an in-house company’s business. The study showed that the private company’s prices were an average of 41% lower than the in-house company’s,” says Reetta Ghezzi, the author of one study, in a press release.
The study found that after privatization, employee efficiency increased by as much as 82.5%. Labour costs fell by an average of 8%. The study’s outcome is based on data obtained after a private accounting firm bought an in-house company, thus providing valuable information about the companies’ different cost and invoicing structures.
“This is a significant result because our study shows that, on average, in-house companies have fewer billable clients and do fewer billable hours than private companies. However, employees in in-house companies are paid, on average, 14% more per hour than in private companies,” Ghezzi says.
Privatization raises cost-effectiveness
The other study examined companies’ turnover in proportion to headcount. The comparison comprised six sectors mentioned in the Government Programme, in each of which two or three of the largest in-house companies in terms of purchases were selected for the comparison. These companies were compared to counterpart private companies in each sector. The sectors included were: general and financial administration; ICT; temping; staff canteen and meal services; property management; and laundry and textile care.
Ghezzi says that the studies provide a strong indication that privatization improves in-house companies’ cost-effectiveness and thus saves central and local government money.
“The studies show that using market operators can be a significantly more cost-effective alternative for public-sector procurements,” Ghezzi says.
Ghezzi says that in-house companies’ operations could be made more efficient either through privatization or oversight. She says that in other European countries, a range of different control points is available for in-house companies, but not in Finland.
The University of Jyväskylä research group would like to see more transparent reporting from in-house companies.
“When companies report on their activities openly and in detail, they create clear data sources which are easy for researchers and analysts to examine and evaluate objectively. This would also make oversight of these companies easier,” Ghezzi says.
How the research was conducted
In-house companies were examined in two studies, the first of which compared 17 in-house companies’ profitability figures to their sectoral medians and to private companies of comparable volume.
The second study compared the efficiency and financial profitability of a private and publicly owned accounting firm in the provision of financial and payroll administration services.
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