The Cost of Canceling a State Contract

"We feel it is important to waste taxpayers' money to relieve political pressure." While that is not the way Gov. Joe Kernan explained his administration's decision to cancel a $15.2 million contract with an India-based company, it would have been refreshingly honest.

Some context helps explains why canceling this contract is a bad decision that portends more troubles. Utilizing money from an economic development grant, the state of Indiana received proposals from three internationally recognized companies to install a new, sophisticated unemployment insurance claims system, aiming to speed claims and reduce bureaucracy. Tata America International Corp., a New York-based subsidiary of Tata Consultancy Services headquartered in Bombay, India, came in with a lower bid than Accenture and Deloitte Consulting. All three are global companies that employ tens of thousands of people outside the United States and thousands more in this country.

No company from Indiana even bid on the contract. Despite this, Kernan claimed it was not political pressure for hiring a foreign firm that led to canceling the contract, but asserted instead: "While we want the best product at the lowest price, we also want to make sure Hoosier companies have every chance to be a part of what we do at the state level."

The Tata proposal was "$8.1 million less than the next-most-competitive bid," The Indianapolis Star reported. Out of 65 contract employees, Tata would have employed a number of Hoosiers through an Indiana-based subcontractor but would also have used Indians currently employed by the firm, working both in the United States and India.

To put these figures in perspective, let's assume that the governor's action leads to hiring an extra 50 people from Indiana at the cost of at least $8.1 million for taxpayers (the difference between Tata's bid and its nearest competitor). That would translate into Indiana taxpayers spending an extra $162,000 per worker on top of what the other Tata workers would have made.

It's clear that the costs of restrictive outsourcing rules could eventually become fiscally debilitating for any state government.

It makes no more sense for the state government to seek U.S.-only or Indiana-only computer services than it would for the governor's office to buy pens made only in Indianapolis or parts for state vehicles made only in Bloomington. It's fine if the pens or auto parts are priced competitively, but under the widely accepted economic theory of "comparative advantage," it is better to have some goods or services produced abroad and consumed here, rather than seeking to produce all goods or services only in the United States (or in Indiana, for that matter).

Both Democrats and Republicans in Indiana have acted poorly in this episode. Democratic House members complained and the governor caved, while the Indiana GOP reprinted an anti-outsourcing article on its Web site and Republican state Sen. Jeff Drozda introduced a bill that allows work in service contracts with the state to be performed only by U.S. citizens or individuals authorized to work in the United States.

To pay for the governor's decision, the state will either have to raise taxes a corresponding amount or likely reduce other services for the unemployed. And for those who favor this action as new state policy, the Indiana General Assembly's Legislative Services Agency warned of Drozda's restrictive bill: "To the extent that this provision could potentially diminish the pool of eligible service providers that can bid for state service contracts, state contracting costs could increase."

While it is unlikely Kernan will reverse his decision, one hopes that greater intellectual rigor and a dose of common sense will prevent actions of this type in the future.