Managing by Contract 123
Smith and Lipsky describe the tasks of nonprofi t social service managers in
several ways. First, there is the problem of cash fl ow. Governments are notori-
ously slow, feeble, and unpredictable in making reimbursements for services al-
ready rendered, seldom a problem in a government hierarchy. Second, nonprofi t
social service organizations usually have a board of directors that sets policy and
hires the top executives. Th ese boards may stay at the policy level and simply di-
rect the way of the organization; but they may also be meddling micromanagers.
Th ird, renegotiating the contract and bidding for new contracts are a nonprofi t
way of life. Fourth, governments contract out to hold down costs and to increase
fl exibility; nonprofi ts are constantly reconfi guring their structures, processes, and
payrolls to squeeze out those savings and remain competitive bidders. Fift h, the
“dance of contract renewal” is oft en protracted and political, requiring manag-
ers to devote large amounts of time to survival activities. In summary, compared
to the hierarchical government social service director, the nonprofi t manager is
more concerned with survival, cash fl ow, and the politics of a board of directors.
Th is nonprofi t manager is almost always very entrepreneurial and shows a high
tolerance for the tensions of contract renewal; this manager also enjoys much
greater latitude in the management of the nonprofi t organization than does the
hierarchical government manager.
Aft er an extensive study of four nonprofi t mental health service providers
under government contract, Keith Provan and H. Brinton Milward (1995) de-
termined that a stable and continuing relationship with government funders con-
tributed to higher performance. Network management was more eff ective when
it was centralized and monopolistic. Resource-rich governments and their con-
tractors were more eff ective than resource-starved governments. Finally, direct
funding to a stable, centralized, monopolistic provider proved the most eff ective.
Having described these and other diff erences between contract management
and ordinary public management, we close this section with a brief consideration
of how government can be an eff ective and smart buyer. Following Kettl (1993b),
it is essential to recognize that contract management is a growing and impor-
tant form of public management. It has made for smaller government in the
sense of there being fewer employees. But it has not made government a smart
buyer. Indeed, a smart-buying government must have a somewhat diff erent kind
of bureaucracy, one with many more frontline bureaucrats trained, hired, and
rewarded to do contract management. Midlevel bureaucrats must be trained in
a contract-theoretic form of management. Elected offi cials, consultants, and ac-
ademics should lower the rhetoric that has done so much to establish the NPM
hegemony and the contract regime. Governments should avoid contracting for
core government functions. Governments as well as public administration schol-
ars and practitioners should recognize that the application of market methods in
the public sector raises important new issues of governance, the subject to which
we now turn.