Faced with a $6 billion budget gap, New York state desperately needs to stretch taxpayer dollars and do more with less. One of the prime solutions can be summed up in a single word all too rarely found in Albany’s bureaucratic lexicon: competition.

For decades, elected officials across America have been inviting private firms to compete for contracts to provide services once restricted to public sources. Democrats and Republicans alike have embraced competitive sourcing as an effective policy tool for driving change in organizations, improving performance and restraining costs.

Competitive sourcing virtually always saves money for taxpayers – often at quite significant levels. In many cases, private firms prove they can provide the same service at a lower price. However, in others, government employees have won competitions by figuring out how to make their own operations more efficient and productive. Either way, in New York’s case, the resulting annual savings could easily rise well into the hundreds of millions of dollars – real money, even by bloated Empire State standards.

Governor Pataki recognized this potential during his first campaign for governor of New York in 1994, when he frequently touted the benefits of opening more public service to private firms. He took an important step in this direction during his first year in office, when he got the state’s public employee unions to agree to contract provisions recognizing the state’s right to contract out services and setting forth severance and transition rights for any government workers affected by outsourcing. This fulfills a vital objective of any competitive contracting process – assuring public employees that they will be treated fairly.

Mr. Pataki subsequently made some headway in selling or privatizing control of government-owned properties, such as Stewart Airport and the World Trade Center. However, competitive sourcing of services – which is not the same thing as “privatization,” per se – has yet to take root as a preferred approach to running New York state agencies.

What New York still lacks is a permanent, institutional framework for making competition a standard way of doing business, and not an exception. The starting point should be a formalized version of what one of the nation’s most accomplished practitioners of competitive sourcing, the former mayor of Indianapolis, Stephen Goldsmith, called “the yellow pages test.”

“If the phone book lists three companies that provide a certain service, the [government] should not be in that business, at least not exclusively,” Mr. Goldsmith said.

In practice, of course, it’s not quite that simple. Once opportunities have been identified, there must be rules for openly conducting competitions, managing and measuring results, and folding competitive sourcing into other management priorities.

Within those broad components are many elements of strategy and process that hard experience has shown are crucial to success. The first is the development of a thorough inventory of government services, distinguishing between “inherently governmental” functions (such as policing and the judiciary) and “commercial activities” for which multiple providers exist. This must be accompanied by a set of accounting standards that allow for valid cost comparisons among public and private bid proposals.

What candidates for competitive sourcing might emerge from the yellow-pages test in New York? The list is a long one but would certainly include highway maintenance, transit buses, correctional services, human resources, welfare and Medicaid administration, mental health, and motor vehicles.

Cutting costs on all of these programs by an average of 10% – the low end documented by studies of competitive sourcing results – would translate into savings of $300 million a year. And in the context of over $100 billion in total operational expenditures by state and local government throughout New York, that’s just the start.

To be sure, mounting effective competitions for state services won’t happen overnight. For most state bureaucrats, it will entail a whole new way of thinking and doing. However, it needn’t involve starting over from scratch.

Drawing from the best elements of competitive contracting models at the federal level and in Virginia, Mr. Pataki should issue an executive order establishing a new body, the Empire Competition Council, to conduct the necessary annual inventory of government services, designate the commercial activities best suited to competitive sourcing, and develop the necessary accounting models for cost comparisons.

The new council should be staffed out of the governor’s budget office (correcting his first-term mistake of assigning all “privatization” initiatives to the state’s economic development agency). In addition, agency managers should be given strong incentives, including but not limited to performance bonuses, to get with the program.

To bolster this initiative, New York should also create a permanent sunset review commission to recommend ways the government can cut costs, reduce waste, and improve efficiency and service levels. Specifically, the commission would review 20% of state programs each year, assess the importance of each agency function and recommend the elimination or consolidation of unneeded or outdated programs.

By developing a contracting process along these lines – combining competition with complete transparency and robust performance measurement – Mr. Pataki can begin saving money now and plant the seeds of bigger dividends for the future.