Weeks after Steve Goldsmith became mayor of Indianapolis in January 1992, his new transportation director announced that a small portion of the city's street-repair work would be put out to bid. Local asphalt companies, which stood to gain as much as $1 million worth of work, applauded the move. The union representing city workers, the American Federation of State, County, and Municipal Employees, took a dark view of the decision. Alarmed by the Republican mayor's campaign pledge to "privatize" up to 25 percent of city government (excluding fire and police functions), it had opposed his election. "Everyone knew Steve as the Prince of Privatization," says Steve Fantauzzo, executive director of AFSCME Indiana Council 62, whose locals represent more than 1,000 city workers. "It doesn't take a rocket scientist to figure out that he's coming after the people that I represent. . . . Initially we operated out of a high fear factor."

The union and the new mayor had been butting heads from Day One. The bid for pothole and crack repairs threatened to escalate the skirmishing, until Transportation Director Mitch Roob told the union that its workers were welcome to submit a bid for the work. "We told the union, if you don't bid you could lose your jobs. If you do, you might maintain them," Roob recalls.

Roob's offer challenged the union's oft-stated claim that it could best any private bidder. "Mitch asked if we were prepared to walk our talk," says Fantauzzo.

We had for years been saying in a lot of places that if we were given a level playing field, the public employees providing day-to-day services were more than prepared to deal with private competition. . . . When the mayor changed the rules of the game to allow employees to participate in the [bidding] process, the union was able to take a much less adversarial position. . . . I thought we needed to position ourselves to be at the table and influence the factors that would determine whether we survived. We couldn't do that sitting on the outside.

The union first told Roob it couldn't compete fairly if it was stuck with the overhead cost of the department's bloated middle management. For 90 crew members, the department had 36 supervisors. Many of them were politically active Republicans--people who had helped elect Goldsmith. When the union raised the issue, Fantauzzo recalls, "we felt that we had thrown a grenade back into [the administration's] lap."

Without warning, Roob laid off half the supervisors. "It just looked to me like if we had 90 truck drivers, we needed less than 36 supervisors," he says. "Probably 18 was a good number." His move--blessed by the mayor--produced an uproar in the local Republican Party. The union had a different view. "When the mayor actually laid off the middle managers," says Fantauzzo, "it was a positive message to our local leadership." AF- SCME agreed to work with the slimmed-down management team to put together a competitive bid. Roob paid an outside consultant $20,000 to help the employees figure out their true costs--information no one had ever wanted before. Working hurriedly, they determined that it cost the city team $407 per ton to get hot asphalt into potholes.

Then they figured out how to cut the cost. In the past, street-repair crews had consisted of as many as eight workers, including a supervisor. They normally used two trucks. Under pressure to compete, union members decided to cut down to four workers, without a supervisor, and one truck. This cut their projected costs more than 25 percent, without reducing service levels.

Seven local asphalt companies also bid for the first contract. "They were convinced that their day had come," says Roob. But they were wrong. The private bids "were absurdly high, all over the map," he recalls. Even the lowest was three times higher than the public employees' offer.

Some Goldsmith supporters pressured Roob to cancel the competition. They argued that awarding the first bid to city workers would damage the administration's credibility with the business community. And they worried that the city team had underestimated its costs and would not stay on budget--a potential embarrassment for the mayor.

Goldsmith left the decision in Roob's hands. Eager to preserve the cooperation he had built with the union, Roob gave the contract to the city employees.

Drops in a Bucket

Gradually, like drops in the proverbial bucket, the savings began to mount. Contracting out microfilm services saved nearly $1 million over three years; window washing, $45,000 over the same period; printing and copying, $2.8 million over seven years. Public-private competi- tion to service the city's swimming pools and utilities saved nearly $500,000 over seven years. When the city bid out trash collection for 10 of its 11 garbage districts, city crews won all three districts in which they were allowed to compete. (No bidder--public or private--was allowed to bid on more than three districts, because the city wanted to prevent a single provider from gaining a lock on the service.) Overall the city was to save $14.8 million on trash collection over three years, but city workers have driven costs down so fast that the savings will actually be closer to $20 million.

The Solid Waste Division produced such dramatic savings in part because it invented a second, more positive, source of consequences for performance: gainsharing. Union leaders proposed that if the division cut its costs below the level it had bid, its employees should share in the savings. Public Works Director Michael Stayton agreed, and they negotiated a deal in which employees would divide 10 percent of the savings--up to a maximum of $3,000 per employee per year.

Motivated both by this target and the competition, the Solid Waste Division beat its first-year bid target of $3 million in savings by a full $2.1 million. Though this entitled the 117 trash haulers and 26 administrative staff members to $3,000 apiece, department leaders balked at such a rich price. Ultimately they agreed to an average of $1,750 per employee, a sum that still set bells ringing throughout city government. Other units quickly copied the program, winning bonuses closer to a range of $500 to $1,000 per employee.

Business as Unusual

By 1996, the city had held 64 public-private competitions, putting up for bid more than $500 million in work on 27 separate services. Public workers had won 16 bids outright and split 13 additional bids with private contractors. The competition had cut the city's costs by more than $100 million, projected over seven years. An additional $20 million in projected savings had come from contracts on which city employees did not bid.

At times, the city refused to allow public units to bid to provide newly privatized services because it thought they could not win. This so angered AFSCME, however, that Goldsmith finally relented, and city workers can now bid whenever they choose to.

By 1996, the mayor had eliminated more than 1,025 of the 4,416 city jobs that existed when he took office. Almost all of the reductions were outside the police and fire departments, where Goldsmith chose not to bid out work. The rest of the city's work force shrank by more than 40 percent--much of it because of competitive bidding.

Although the city does not keep these figures, Deputy Mayor Charles "Skip" Stitt guesses that about 20 percent of these 1,025 people were laid off. The rest went to work for private contractors, were moved into vacant city jobs, were placed in private sector jobs, or took early-retirement packages. Yet not one union member was laid off. Goldsmith never made a "no-layoff" pact with the unions, but his administration implemented a de facto no-layoff policy for the 20 percent of the work force that belonged to unions.

City employees had feared competition but discovered they could win bids. "The bidding process is telling you that you've got to dig down and make every effort to maintain your job," explains Jeffrey Thomas, a 10-year employee in the Solid Waste Division. His unit increased daily workloads and redesigned trash-collection routes to win its bids. Through competition it even expanded its "market share" of the city's garbage-pickup routes.

And the public employee union found it could use competitive bidding to improve its members' pay and benefits, through gainsharing. The Solid Waste Division's $1,750 gainsharing payments sent a loud message to city employees. Another unit quickly submitted a bid that waived its right to a cost-of-living increase because it feared the pay boost would make its proposal uncompetitive. Instead, it persuaded the city to agree to gainsharing if it brought the work in under the proposed price.

By 1995, the combination of gainsharing, competitive bidding, and job security had begun to produce employee behavior that would be unthinkable in most governments. In Fleet Services, where the employees negotiated a 25 percent share of any savings below the price they bid, employees were beginning to suggest outsourcing when it would save money. In auto body work, for example, the city shop was not competitive with private shops. So it began outsourcing that work and moving the displaced employees into more competitive areas. In 1994 it outsourced only 15 percent of body work; in 1995 it increased the amount to 37 percent.

"The outsourcing issue used to be a big fight with the administration," says Stitt. "But now it's not. There's no bickering if the employees can save--and make-- money on the deal."

Fantauzzo confirms this change:

Those employees and their managers are determining what they do best, their core activities. We don't do body work best, so let's get out of the body work business. The next step is what they're looking at now: expanding what they do well and doing more of it.

Fantauzzo is referring to a trend that began to emerge in 1996. Motivated in part by the prospect of gainsharing, his members and managers such as Michael Carter in Solid Waste are teaming up to go after new business-- from other city departments, from other public organizations, and from nearby governments. Solid Waste, which has already won contracts with municipalities in the neighboring county, is looking at private sector opportunities and pushing for the right to bid in more than three of the city's garbage districts.

Fantauzzo wants the city to allow other units to do the same. He finds himself in an unfamiliar position for a union leader: marketing his members' services.

Going after new business is something we've never done before. I find myself going to [city departments] and saying, "Why are you going to a private garage to get your trucks fixed? You should contract with the city garage for fleet services."

Fantauzzo says that gainsharing has not changed employees' attitudes toward competition, which are still mixed:

On the one hand, there is a lot of apprehension about whether they'll be employed. . . . But on the other side of the ledger for the first time in a long time, employees have been asked to stop parking their brains at the door when they come to work. They actually have been empowered to participate in the decisionmaking process. Workers are being asked how to do the job more efficiently and more effectively.

But combine that empowerment with gainsharing and you get an entirely different attitude about productivity, he says. "Look at what happens in the 11th month of a budget in traditional government: Everyone is looking to spend the last dime to justify that plus more next year. Here, people are looking to save every dime because they figure a piece of the pie is going into their pocket."

In 1991, Fantauzzo was looking for ways to keep Goldsmith out of the mayor's job. At his union's annual pre-election convention, the members booed Goldsmith. But in 1995, at the same convention, they gave him a standing ovation. The city workers wanted to endorse him, but the teachers, who opposed a reform slate of school board candidates Goldsmith was promoting, did not. So the union endorsed no one. (Goldsmith won re-election with almost 60 percent of the vote.) Meanwhile, Fantauzzo partners with Stitt at conferences to explain the city's competition process. "I suspect some union colleagues in other areas of the country are raising their eyebrows," he muses.

David Osborne and Peter Plastrik are the authors of the book Banishing Bureaucracy: The Five Strategies for Reinventing Government, from which this article was adapted. Copyright 1997 by David Osborne and Peter Plastrik. Reprinted by permission of Addison Wesley Longman. All rights reserved.