According to the New York Times, outsourcing of government functions has become so common, contractors now make up a "virtual fourth branch" of U.S. government. On his personal blog, Matthew Yglesias argues that this sets up a worst-of-both-worlds scenario:
The trouble with government work, as opposed to the private sector is that there's a lack of efficiency. It's important to understand, however, that there's nothing intrinsically efficient about private sector work. No magical "it's the free market" dust comes and renders private enterprises effective. Rather, the idea is simply that an inefficiently run private enterprise (and there are many) would simply go out of business. An inefficiently run government office, by contrast, goes out of business when it loses political support and sees its budget grow as long as it maintains political support. Thus, you see public sector dollars flowing to whatever there's a strong political constituency for, whereas private sector dollars flow to wherever well-managed firms are meeting demand.
Then enter government contractors which, as The New York Times points out, have exploded to unprecedented levels under George W. Bush and the late unlamented Republican congress. Here you have private enterprises displacing government. Why? For the private sector efficiency, of course! But you don't actually get that efficiency. It's still a government program. Funding is still being determined by political support. The cash doesn't go to companies that can do a really good job, it just goes to companies that have political clout . . . .
For a very detailed history of government outsourcing over the last year and a half, AFSCME runs a blog called AFSCME Privatization Update, which has tracked the privatization of government functions since 2005.