June 2004 · Volume 86 · Number 5

Talking Trash with the Private Sector

by Robert B. Scott
When Carrollton, Texas, began a managed competition process, the first department to compete with the private sector was the Carrollton Solid Waste Division (CSW), for residential waste collection and disposal. As author of the request for proposals (RFP) and chairman of the selection committee, I gained an exceptional perspective on why individual proposers won or lost the competition. These insights can possibly assist other departments and local governments in preparing for their own managed competitions.
These observations are not intended to be judgments or criticisms of specific competitors. Rather, they are an opportunity to learn from well-run private sector companies that have spent millions of dollars increasing the efficiency of their operations.
CSW lost the residential managed competition bid, and all solid waste services, including commercial, have been outsourced to the private sector. In my opinion, the outcome of Carrollton’s first venture into managed competition can be attributed to three factors: productivity, experience, and customer service.
In this article, I support this position by describing specific differences noted between the private sector and CSW, and how some myths believed by city employees about the private sector waste industry affected the outcome. 
Why Would So Many Companies Want to Pick Up Garbage?
From the start of the managed competition, it was obvious that price would be a key factor. A survey of 35 cities in the Dallas/FortWorth metroplex revealed that the monthly per-residence charge within cities that provided solid waste services with in-house crews was $13.50, as compared with $9.00 in those cities that had contracted out to the private sector. It also was common for cities that rebid their solid waste services at the end of the contract to receive a lower price than they had been paying previously.
Carrollton’s RFP kept the proposed level of services to its 29,500 residences similar to what residents were already receiving. It also provided for a stranded-cost component of rates that would compensate the city for those solid waste–related costs that could not be eliminated by outsourcing. CSW used four 10-hour days to service the city, but because the industry standard is five 10-hour days, the RFP did not require the four-day schedule to be maintained.
Six proposals were received, with initial pricing ranging from $9.47 to $11.94 per residence, with premium service (an extra charge for excessive bulk or brush set-outs) ranging from $16 to $64. All-inclusive services, which had no surcharge for excessive set-outs, ranged from $9.61 to $12.85. The monthly charge for a second waste container ranged from $1.00 to $5.90.
Some of the most competitive pricing came from proposers who maintained the four-day schedule so that residents would not have to change their day of service. Based on a concern over the length of the day for the four-day schedules, however, the committee asked these proposers to reprice using a five-day schedule and the all-inclusive alternative of no surcharge for excessive bulk and brush.
The winning proposer was Allied Waste Services, with an average price per month over the five-year contract of $10.15, with the second container costing $1.56 per month. (Compared with Carrollton’s current monthly charge of $11.75 and $5 for the second container, residents will save more than $3.7 million during the five-year contract period.)
After analyzing the proposals and service plans, it became obvious that the private sector proposers actually had to overcome significant disadvantages to be competitive. For example, the location of the winning proposer’s staging facility required its trucks to go 30 miles farther per day and to incur $2.40 per day in toll charges per truck.
All private sector proposers also had lower credit ratings, with the financially strongest being a BBB-. These low credit ratings translate to a much higher cost of capital. CSW, on the other hand, had a AA bond rating, with a strong cash position; could borrow at a tax-exempt rate; did not have to pay sales tax, income tax, or franchise tax; and had no outstanding debt associated with its residential operations. CSW’s location was within the city; it had relatively new residential equipment; and it benefited from tort liability limits that were significantly lower than those in the private sector.
Lowering pay or cutting benefits is not the solution to becoming more efficient. Forging strong links between pay and performance appears to be one of the most effective management tools available.
Carrollton did not own a landfill but did have a long-term contract with one, which covered the RFP period. Two of the five private sector providers owned or operated a landfill within a 30-mile radius of the city. Although I do not believe that CSW’s not owning a landfill was a critical disadvantage, given its long-term contract, the winning proposer happened to operate the landfill that the city used. This knowledge of the city’s tonnage per truck, seasonality, and brush volume was a strategic advantage for Allied Waste. 
Productivity + Profits 
Productivity, which appears to be the biggest single factor in the winning proposal, can be divided into two categories: labor and equipment. CSW’s workplan included 19 front-line vehicles to service the city’s 29,500 accounts for weekly garbage, recycling, and bulk/brush pickup.
This number of vehicles also represents the number of drivers necessary to service the city. The average for the private sector proposers was 13 vehicles, with individual proposals ranging from 11 to 15.
Based on these numbers, the private sector was 32 percent more efficient than the CSW. This efficiency was in spite of every proposer’s having a significantly farther distance from which to drive and often a longer trip to the landfill. This greater productivity was accomplished in these ways:
Performance measurements. The private sector uses performance measures extensively. These measures are tracked daily, weekly, and monthly, and driver-related measures are typically shared with the drivers weekly, through a posting of everyone’s results in a prominent location. Measures tracked might include missed pickups, accidents, or claims; tonnage generated, by driver; or time to complete a route.
Drivers have no doubts as to how they are performing in relation to their peers. In addition, management and supervisors review financial results on a monthly basis, and many companies have an even more detailed review quarterly.
Another difference in personnel management was the identification of a substandard performer. The city had a more intuitive, subjective process, whereas the intensive use of performance measures in the private sector is objective and enables managers to take action sooner. In addition, because of high-liability exposure for vehicle accidents, the private sector has much stricter safety rules and more severe consequences if these rules are violated. For severe accidents or extremely unsafe behavior, there is “zero tolerance,” and drivers can be dismissed for a single incident.
Compensation. On average, private sector drivers earned the same or more per hour than CSW drivers, and the most productive drivers earned significantly more. The method of compensation, however, differed significantly between CSW and the private sector.
At CSW, every driver was classified as an equipment operator 2, and the longer the worker had been with the city, the more (s)he made per hour. In the private sector, the hourly rate and earnings potential are directly influenced by the type of truck driven; the more complex and profitable truck types earn a higher wage for their drivers. Rear-load trucks are considered the easiest to drive, so these drivers have the lowest earning potential.
Automated side-load trucks require the driver both to drive and to operate a sensitive hydraulic side arm. These drivers have higher earning potential. Front end–load trucks, associated with commercial accounts, also require these dual skills. They service the most profitable customer base and accordingly have the highest earning potential.
CSW used a fixed hourly rate system, but the private sector used a “piece rate” system. In such a system, the worker is paid by the “piece” produced (in this case, a certain number of homes serviced) rather than by the hours worked. This compensation method works well in the solid waste industry, where the worker is performing basically the same task every day. The contractor still must calculate an hourly rate, including time-and-a-half for anything over 40 hours.
In the piece rate system, the total amount earned stays the same for a specified route, but the hourly rate varies depending on the number of hours it takes a worker to perform the task. In the traditional fixed hourly-rate system, a worker who takes 13 hours to service what should be a 10-hour route is, ironically, rewarded by earning three additional hours of pay at time-and-a-half.
In the piece rate system, the employer pays nothing extra because the route takes longer; the worker simply earns less per hour. Thus, in the piece rate system the employees’ pay checks in essence become part of the employees’ performance review, and it is easy for management to identify the less productive workers.
As an additional incentive, the more productive workers, who finish early, are often asked to finish other workers’ routes. For these special tasks, they are paid the average hourly rate that they have earned under the piece rate system.
For example, if the average hourly wage for a highly productive worker was $17 per hour for the previous three weeks, that would be the rate per hour paid for this worker to complete a special task. Nonproductive time such as sick or vacation leave may be paid at the historic rate earned by the employee or at an average rate for that driver type, depending on the company.
Most private sector companies, however, ensure that extensive time off lowers the worker’s average hourly earnings, thus providing an additional incentive to be on the job.
Benefits. It is a common misperception that benefits are always more generous in government as compared with the private sector. This was not my finding while evaluating solid waste providers. CSW did have a clear advantage on pensions by offering TMRS, with the private sector typically offering some percentage match to a 401k plan (perhaps 50 percent), up to some relatively low limit. This disparity can at least partially be attributed to the city’s exemption from Social Security taxes.
The other area in which the private sector is not as generous is in sick pay. CSW has provided two weeks of sick pay per year up to five years and three weeks thereafter. The private sector often provides simply “personal days,” with one week or less being typical. One provider offers only one personal day but offers short-term liability insurance providing 60 percent of pay for short-term illnesses. Under this benefit approach, the employee is always better off working, which limits unscheduled absences.
On the other hand, health care benefits were often more generous and less expensive for private sector employees than for the city. This is indicative of the volume purchasing power of national companies and of the recognition that solid waste truck drivers are skilled employees whom these companies wish to retain. These private companies’ abilities to operate at much higher productivity levels is also a factor because health care costs can be spread over 30 percent more accounts.
Specific vacation time in the private sector was generally equivalent to the city’s offerings, although some companies provided up to four weeks once an employee reached 10 years of service; vacation at the city is capped at three weeks per year. The private sector also has more flexibility in giving out bonuses for specific behavior, such as a safety bonus for an accident-free quarter or a profit-sharing bonus at the end of the year.
CSW, as part of its proposal, had been prepared to institute a profit-sharing plan if it had won the competition.
Equipment use. One of the biggest differences between the private sector and the public sector is how managers view equipment and capital investment. In the public sector, managers view equipment as a budget request that, if approved, is in essence “paid for.” In the private sector, equipment is a liability that can only be justified if it generates far more revenue than it costs.
The private sector also tends to keep its vehicles longer. CSW considered seven years to be a standard useful life for its trucks. One private sector provider I talked to, however, keeps vehicles for 11 years. It was explained that solid waste trucks have three components that generally wear out and are expensive to replace: engine, transmission, and hydraulics. Typically, two of the three require replacement in years six or seven, but once the third item has been replaced, the vehicle is inexpensive to maintain for the next several years.
Private sector proposers were relatively uniform in their determinations of the amount of equipment needed to service the city, averaging 13 front-line vehicles (CSW had proposed 19 front-line vehicles). This was accomplished through greater productivity per hour and by working a standard 10- to 11-hour workday five days per week. The concept of a standard 50-hour work week is a paradigm change for the public sector, which views overtime as expensive and to be used only in times of heavy workloads or staffing shortages.
The solid waste industry, however, has recognized that there can be several compensating factors, such as reduced investment in equipment and lower turnover. Not all employees want 50-hour weeks, of course, but for many truck drivers, long hours are needed to balance the family budget. Alternative trucking jobs might take them away from home for more extended periods of time.
Guaranteeing the extra hours gives these workers a higher level of income and a relatively constant one that could not be easily duplicated in other industries. As one private sector manager explained it, “We’re not for everyone, but once they get used to us they generally stay.” This manager reported turnover as being 5 percent of drivers or fewer.
The Experience Factor/Customer Service
CSW had a history of management turnover, with four permanent and four long-term interim managers in a 12-year period. These managers also reported to four different directors or assistant city managers in that same 12-year period. As the manager position became vacant, the general hiring trend tended to be city experience first, solid waste experience second. Several of the managers hired had city experience but no extensive solid waste experience, and specifically no extensive private sector experience.
Just before the managed competition process, when the manager position again fell vacant, because of the looming possibility of outsourcing, both the CSW manager and supervisor were on temporary assignment. The solid waste industry, on the other hand, benefits from some long-tenured managers, many of whom had had fathers who had worked in the industry before them and felt a loyalty to the industry.
It is clear that increasing productivity, benchmarking the competition, and maintaining public and council perceptions of high levels of customer service should be top priorities.
Public sector lack of experience showed up during the RFP process in several different ways. CSW had a reputation for superior customer service, but as efforts were made to reduce costs, service suffered. To further complicate matters, a decision was made to begin charging for excessive set-outs for brush and bulks.
During the selection process, a large number of citizen complaints came in. In retrospect, I would recommend no dramatic service changes in the 12 months leading up to a managed competition. CSW would have benefited from fine-tuning its existing delivery systems, rather than implementing new policies.
It appears that customer service is the bottom line. Ultimately, the selection committee chose two finalists that had both competitive pricing (although not the lowest) and a genuine customer service reputation among the cities they already served. Price got these two into the finals, but the ability to provide superior customer service from transition forward won the competition.
One example was the pricing strategy of the two finalists regarding second containers. These two companies priced second containers at $1.56 and $3.64, with CSW at $5.90. The philosophy of the two finalists was that they would be picking up the garbage anyway, and by making second containers more readily available, customer service would be improved by avoiding overloaded cans, excess garbage on the curb, and citizens’ resorting to refilling their cans and claiming a missed pickup.
We Can Be Competitive
After participating in the solid waste managed competition, I remain convinced that local governments can compete with the private sector. In many cases, their advantages of location and tax-exempt status give them the luxury of not having to be the most efficient competitor in every category, or even any category.
Tax-exempt status, however, is not enough to offset large differences in productivity, management approach, and equipment use. It is clear that increasing productivity, benchmarking the competition, and maintaining public and council perceptions of high levels of customer service should be top priorities.
Localities also can learn from the private sector regarding communicating expectations to employees and designing compensation systems that reward performance. Lowering pay or cutting benefits is not the solution to becoming more efficient. Forging strong links between pay and performance appears to be one of the most effective management tools available.
Citizens are the real winners in managed competition. As a result of Carrollton’s waste disposal competition, residents’ monthly bills were lowered, and their “take-all” weekly services were increased. This result aligns with the city council’s strategic goal of delivering quality services at a low cost.
We continually look for better ways to respond to the changing needs of our community and to maintain or improve city government services. Our service teams are working to become more competitive with private industry providers and to use taxpayer money efficiently and effectively.

Robert B. Scott is assistant city manager for finance, Carrollton, Texas.
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