Public sector outsourcing to a subsidiary company from a principal-agent perspective: efficiency or challenges?

Using the lens of principal-agent theory, this study examines the efficiency paradox and governance challenges in outsourcing facilities management (FM) services to a subsidiary company within the public sector. A case study approach was employed to investigate a higher learning institution’s FM outsourcing arrangement. Data were collected through semi-structured interviews and focus group discussions involving key stakeholders, including representatives of the parent institution, end users, FM staff, and finance officers. Relevant documents, including contracts and performance reports, were also reviewed. The qualitative data were analysed thematically. The findings reveal critical agency-related tensions arising from internal outsourcing. Goal incongruence emerged as the subsidiary prioritised cost reduction over service quality, leading to staff shortages and heavier workloads. Information asymmetry manifested through incomplete and inaccurate reporting, which constrained the principal’s capacity to monitor performance effectively. The subsidiary’s excessive reliance on the principal for supervision blurred the accountability boundaries, undermining the intended efficiency gains. Moreover, weak contract enforcement and monitoring mechanisms enabled opportunistic behaviour, false reporting, and diminished accountability. This study is among the few to explore public sector outsourcing to a subsidiary company, a hybrid arrangement that combines elements of both internal and external contracting. It advances the outsourcing literature by exposing the unique agency risks, governance gaps, and accountability dilemmas inherent in such quasi-market relationships.