The whole-of-government IT outsourcing initiative


Current Issues

The whole-of-government IT outsourcing initiative

E-Brief: Online Only issued March 2001; updated 28 May 2001

Ian Holland, Analysis and Policy
Politics and Public Administration Group

Introduction

The outsourcing of the Commonwealth Government’s information technology (IT) infrastructure has been controversial. This e-brief provides readers with some background, an account of the debate around this policy, a chronology of key events, including reports, and some useful internet links.

Background

The outsourcing of the Commonwealth Government’s IT services has been on the agenda since 1991. In February 1997, the Department of Veterans’ Affairs made arrangements to outsource its IT needs. Subsequently, the whole-of-government approach was announced in April 1997. This approach was controversial, largely because it was centrally directed by the Minister for Finance and Administration.

The 1997–98 Budget Papers noted that:

The Government is seeking long-term improvements in the structuring and sourcing of IT services across agencies aimed at facilitating greater integration in the delivery of programs and realising significant cost savings. Efficiencies will be obtained by consolidating the Commonwealth's IBM and compatible data centres and outsourcing IT infrastructure services across all Budget-funded agencies subject to the outcome of competitive tendering (CT) processes. Agencies with Running Costs below $10 million in 1998-99, and agencies operating IT systems or services concerning national security, have been excluded from the scope of this measure. CT processes will be undertaken in accordance with whole of Government principles and arrangements on consolidation and competitive tendering. (Budget Measures 1997–98, Budget Paper No. 2)

This whole-of-government initiative required budget-funded agencies to outsource mainframe services, midrange systems, distributed and desktop operations, support services and data networks. Agencies could elect to include voice telecommunications services and/or applications development and support (Commonwealth Auditor-General, Implementation of Whole-of-Government Information Technology Infrastructure Consolidation and Outsourcing Initiative, Commonwealth of Australia, Canberra, 2000, p. 40). A more detailed explanation is available at www.oasito.gov.au.

The Office of Asset Sales and IT Outsourcing (OASITO) is the organisation that was charged with directing this program. It has described the scale of this project as ‘immense’, being worth approximately $4 billion across sixty agencies (OASITO Annual Report 1999–2000, p. 23).

The debate about IT outsourcing

Anticipated benefits

On the OASITO website, the Government listed the following anticipated benefits of IT outsourcing:

  • encouraging competitiveness
  • encouraging the development of common IT architectures and interoperability across agencies to improve efficiency and program delivery
  • reducing replication of effort in developing solutions to common requirements with consequential duplication of procurement and support processes and structures
  • strengthening the Commonwealth’s capacity to gain value for money in its use of IT infrastructure into the future through open competitive sourcing and a clearer focus on its core responsibilities in the delivery of programs
  • improved potential for staff career development in an environment where IT&T is the core business
  • enhancing industry development

Further discussion of the benefits of IT outsourcing can be found in the media releases of the Minister for Finance and Administration.

Benefits disputed

The whole-of-government approach to IT outsourcing faced immediate and sustained criticism. For example:

  • Senator Kate Lundy, Shadow Minister Assisting the Shadow Minister for Industry, Innovation and Technology on Information Technology, disputed the anticipated cost savings and argued that outsourcing could be harmful to industry development and data privacy. See her website for more details.
  • The Community and Public Sector Union expressed similar concerns. See its media releases at the CPSU website, and its submission to the Senate inquiry, which was announced in November 2000.
  • Several government agencies have disputed the anticipated benefits of such an approach. ScreenSound has told a parliamentary inquiry that ‘Outsourcing IT operations in the absence of a clear business case was not the preferred approach for the Archive’ and that the organisation had incurred a net cost of over $150 000 through outsourcing IT (comprising extra costs as well as reduced funding due to anticipated savings). The Bureau of Meterology has argued that some of its IT services are inappropriate for outsourcing and noted that the reduction in funding would impact on operational effectiveness. See the submissions of these agencies to the Senate inquiry.

Auditor-General’s report

The Auditor-General’s report on the Implementation of Whole-of-Government Information Technology Infrastructure Consolidation and Outsourcing Initiative (available at www.anao.gov.au) made several significant criticisms of the outsourcing process. These concerned issues such as the cost and timeliness of the program, the methodology used to calculate savings, the timing and extent of budget cuts in anticipation of savings, the management of security and privacy issues, the management of the relationship with the strategic adviser, and service delivery disruption. The Auditor-General made the following recommendations about the IT outsourcing process. The Government’s response follows in italics.

Recommendation No. 1

ANAO recommends consideration of the advantages to the Commonwealth of having a specific agency assigned responsibility for the conduct and coordination of market surveillance and analysis to support and inform strategic planning by agencies for the re-tendering of outsourcing Agreements following completion of the initial implementation of the IT Initiative.

DOFA whole-of-government response: Agree.

Recommendation No. 2

ANAO recommends that, as part of the management of Commonwealth IT outsourcing contracts, relevant agencies institute a framework to support the identification of opportunities to enhance the synergistic benefits available from the composition of agency groupings, either during the initial contract term, where cost-effective, or in the future re-tendering of the outsourcing agreements.

DOFA whole-of-government response: Agree. Agencies agree to pursue synergistic benefits between agencies within existing groups or with other portfolio agencies during the term of the agreements and in any re-tendering activity.

Recommendation No. 3

ANAO recommends that:

a) OASITO and DOFA agree a timetable for the finalisation and implementation of an evaluation strategy for assessing whole-of-Government outcomes achieved under the IT Initiative;

b) relevant agencies develop an evaluation strategy for consistently assessing and reporting outcomes achieved under IT outsourcing arrangements from the perspective of agency groups and individual agencies; and

c) OASITO considers further enhancing its lessons learned processes through the development of mechanisms for the collection, distribution and maintenance of documented lessons learned material, together with appropriate request for tender and contractual material, arising from previous IT outsourcing tender processes to assist agencies undertaking subsequent processes.

DOFA whole-of-government response:

– Part (a): Agree. DOFA and OASITO will review the scope of the proposed evaluation strategy for assessing whole-of-Government (WOG) outcomes under the IT Initiative. The review of scope would focus on those areas where ongoing WOG monitoring can be most effective.

– Part (b): Agree. The respondents support efforts to make use of monitoring and reporting provisions in service agreements to assess outcomes achieved under IT outsourcing arrangements.

– Part (c): Agree. OASITO will continue to explore opportunities to further enhance its existing lessons learned processes through improved clarity in documenting these processes.

Recommendation No. 4

ANAO recommends that, where appropriate, OASITO improve its management of the Strategic Adviser consultancy for the remaining duration of the IT Initiative by defining key deliverables and milestones required to be delivered by the Strategic Adviser.

DOFA whole-of-government response: Agree with qualification. OASITO considers that its management of the Strategic Adviser has been sound, but will investigate opportunities to establish key milestones and deliverables where appropriate.

Recommendation No. 5

ANAO recommends that, in future IT outsourcing tenders, relevant agencies ensure that a comprehensive brief confirming the contractual arrangements negotiated with the preferred tenderer, including updated analysis of cost savings, industry development commitments and satisfaction of evaluation criteria, is provided to the relevant Ministers in support of any recommendation to enter into the final contract.

DOFA whole-of-government response: Agree. ANAO should acknowledge that, in the two cases in issue, the basis of the outsourcing business decision did not change between the selection of each preferred tenderer and contract signing.

Recommendation No. 6

ANAO recommends that agencies ensure that consultancy agreements developed for the provision of probity auditing services in future IT outsourcing tenders stipulate:

a) that a comprehensive probity plan is to be finalised before the commencement of the tender process;

b) the nature of any sign-offs and reports to be provided by the probity auditor to the decision-maker; and

c) that the scope of the probity auditor's services include provision of a formal sign-off to the decision-maker prior to the execution of the final contract.

DOFA whole-of-government response:

– Part (a): Agree, providing it is acknowledged that the probity framework was developed for Cluster 3 and incorporated in the Cluster 3 Project Plan prior to release of the RFT. The probity framework was appropriate and has been applied in all tender processes under the Initiative. The activities identified in the project plan are reflected in the Probity Auditor's Contract Schedule of Services.

– Part (b): Agree, providing it is acknowledged that the decision maker was advised of probity auditor Sign Offs at relevant project milestones and that the signoffs agreed with the probity auditor were in an acceptable form.

– Part (c): Agree.

ANAO comment: The recommendation is directed at supporting the improved application of good practice in future tenders. The probity plan identified by OASITO as having been provided to it by the Probity Auditor did not identify the independent audit testing that the Probity Auditor planned to undertake as the basis for providing the required clearances and sign-offs or the probity principles that would be applied by the Probity Auditor in forming those assessments (refer discussion at paragraphs 4.15 to 4.20 of report). The sign-off provided should be directed at confirming that there has been compliance with the probity principles covered in the comprehensive probity plan provided by the probity auditor. Agreeing the sign-off that will be provided at the time a probity auditor is engaged would assist in providing greater certainty as to the form and standard of assurance required from the probity auditor at the conclusion of the process (refer discussion at paragraphs 4.21 to 4.22 of report).

Recommendation No. 7

ANAO recommends that, when conducting financial evaluations involving uneven cash flows over time, relevant agencies account for the time value of money in net present value terms, consistently applied in the evaluation outcomes presented to the decision-maker.

DOFA whole-of-government response: Agree with qualification. Financial evaluations calculated the time value of money using a variety of discount rates to determine the sensitivity of tender evaluation decisions to inflation and other factors. OASITO is prepared to expand the discussion of NPV (net present value) values in the formal reporting processes, but considers that the methodology adopted in the tender processes in question was appropriate.

Recommendation No. 8

ANAO recommends that, in future IT outsourcing tenders, relevant agencies enhance transparency and accountability of decision making in the tender process by incorporating into the evaluation planning process consideration of the means by which tenderers will be ranked in terms of the best combination of value for money/cost savings and industry development criteria.

DOFA whole-of-government response: Disagree. The evaluation planning process is clear and takes full account of Government policy objectives.

ANAO comment: A tender evaluation is one part of a tender process and must be conducted in accordance with that process, especially where the process to be followed has been notified to the tenderers. The evaluation criteria set out in the respective RFTs for the tenders reviewed provided that, in specified circumstances, the preferred tenderer would be based on an assessment of the tenderer that provided the best combination of cost savings and industry development. In none of the tenders reviewed did the tender evaluation planning articulate the approach that would be used to determine that combined assessment.

It is open to the Commonwealth to select the winning tenderer on any basis it chooses, provided that the Commonwealth deals fairly with all tenderers in conducting the process. Accordingly, the recommendation is directed at supporting the establishment of an appropriate framework for determining the basis on which the successful tenderer would be selected before the tender documentation is issued, and for devising suitable evaluation criteria that would provide a sound methodology for distinguishing between tenderers on that basis. It is acknowledged good administrative practice for the evaluators to decide how the criteria would be applied before they consider the tenders. In this case, it would involve incorporating into the evaluation planning process consideration of the means by which tenderers would be ranked in terms of the best combination of value for money/cost savings and industry development criteria.

Recommendation No. 9

ANAO recommends that, in future IT outsourcing tenders, relevant agencies consider the release of a draft Request for Tender for industry comment to assist in the development of IT offerings that will maximise competitiveness and support the achievement of cost-effective outcomes.

DOFA whole-of-government response: Agree. OASITO and Group Agencies will continue to determine, for each tender process, where the release of draft tender material in advance of the RFT release, is warranted. This decision has been taken in each tender process run under the IT Initiative to date.

Recommendation No. 10

ANAO recommends that, in future IT outsourcing tenders, relevant agencies enhance the transparency and accountability of decision making by documenting explicit consideration of the extent to which tenderers comply with all evaluation criteria and preconditions identified in the Request for Tender.

DOFA whole-of-government response: Agree. All tender processes have considered the extent to which tenderers comply with all evaluation criteria.

Recommendation No. 11

ANAO recommends that relevant agencies ensure that future IT outsourcing agreements complement the Government's whole-of-Government telecommunication policy by stipulating a requirement that:

a) relevant services be provided to agencies in accordance with whole-of-Government telecommunications arrangements, including that services must be procured under a whole-of-Government Head Agreement supported by appropriate reporting arrangements; and

b) all telecommunications services be procured in the name of the Commonwealth unless otherwise agreed in writing by the Office for Government Online.

DOFA whole-of-government response:

– Part (a): Agree. Whole of Government telecommunications requirements are defined by Office for Government Online (OGO) in consultation with OASITO. OGO reviews each RFT for IT&T services prior to release to ensure consistency with whole-of-Government telecommunications requirements. ANAO's recommendation will be implemented to the extent it is consistent with whole-of-government requirements as advised by OGO.

– Part (b): Agree with qualification. The current tendering rules permit tenderers to propose telecommunications services under two alternative models, consistent with whole-of-Government telecommunications requirements as advised by OGO.

Recommendation No. 12

ANAO recommends that, in order for the evaluation to identify the true financial value to the Commonwealth of future IT outsourcing tenders, relevant agencies include, at a minimum, the estimated fair market value of agency residual assets that provide service potential beyond the evaluation period.

DOFA whole-of-government response: Disagree. The methodology adopted for the implementation of the IT Outsourcing Initiative does not include this residual asset value. This methodology is consistent with independent expert advice obtained by OASITO and applicable Government policy, although some agencies have noted an alternative approach.

ANAO comment: ANAO considers that this is a methodological issue associated with determining the financial value to the Commonwealth of adopting an alternative service delivery method. Accordingly, the analysis presented to the decision maker should capture the future service potential available to the Commonwealth from agencies' assets at the end of the evaluation period. No financial adjustment was made in OASITO's analysis for the value of agencies' assets remaining at the end of the evaluation period. The implication of this is that the direct cost savings from outsourcing achievable by agencies were overstated in the evaluation report presented to the decision maker.

Recommendation No. 13

ANAO recommends that, in conducting future IT outsourcing tender evaluations, relevant agencies:

a) identify the risks and benefits relating to ownership of assets that will be borne by each party under the proposed leasing arrangements in order to properly identify the economic substance of the transaction; and

b) inform the decision-maker of the financial implications of the proposed operating or finance equipment lease arrangements prior to execution of the final contract.

DOFA whole-of-government response:

– Part (a): Agree with qualification. Based on expert advice from a number of accounting firms, a law firm and a specialist leasing adviser, the Finance and Administration portfolio does not agree with ANAO's characterisation of certain equipment components of the IT service agreements. The Australian Bureau of Statistics has indicated it will follow this treatment for Government Finance Statistics purposes. OASITO does not accept that the evaluations have failed to "properly identify the economic substance of the transaction".

– Part (b): Agree with qualification. The evaluation reports will include an explanation of the accounting treatment and any associated liabilities. However, based on expert advice the Finance and Administration portfolio disagrees with ANAO's characterisation of certain equipment components of the IT service agreements.

ANAO comment: Refer to ANAO comment at paragraphs 7.28–7.29:

ANAO has undertaken a co-ordinated review of seven major Commonwealth IT outsourcing agreements in order to form a view as to the appropriate accounting treatment of the relevant component parts in each case. Of the seven agreements reviewed, ANAO has formed the view that three involve operating leases, while the remaining four involve embedded finance leases on certain equipment (including the three Agreements considered in this audit). DOFA's views on the classification of the IT&T Agreements as service agreements that do not inherently give rise to embedded finance leases is not in accordance with ANAO's assessment of the economic substance of a number of the transactions (for example, see Figure 7.2 in report in respect to Group 5). In all cases, materiality considerations were also applied to determine whether the lease component should be accounted for separately in the relevant agencies' financial statements for 1999–2000. Nevertheless, ANAO would encourage the agencies involved in the four Agreements referred to above to have those leases identified as finance leases in next year's financial statements.

The relevant accounting standard states that the passing of substantially all the risks and benefits incident to ownership from a lessor to a lessee is normally presumed where both the following criteria are satisfied: the lease is non-cancellable; and either one or both of the following presumptive tests are met—the lease term is for 75 percent or more of the remaining economic life of the asset; or the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased asset at the inception of the lease. ANAO's view is that the relevant leases are non-cancellable and the presumptive tests are met; and that substantially all the risks and benefits of ownership have been transferred to the Commonwealth. While ANAO notes the disagreement based on specialist advice received, it considers that the arrangements accord with the intent and provisions of the relevant accounting standard. This is not a discretionary decision.

Recommendation No. 14

ANAO recommends that, for future IT outsourcing tenders, relevant agencies properly account in the financial evaluation for any residual end-of-period Commonwealth obligations arising from underwriting tenderers' asset risk associated with the outsourced services.

DOFA whole-of-government response: Disagree. The base financial evaluation should not include a contingent liability in relation to dedicated end of term assets. Any contingent liabilities will be disclosed in the evaluation reports in the form of scenario sensitivity analysis. This treatment is consistent with expert advice obtained by OASITO and consistent with Government policy on IT outsourcing.

ANAO comment: ANAO does not consider that the most appropriate treatment is the exclusion from the base financial evaluation of Commonwealth financial obligations for tenderers' end-of-term assets. The Commonwealth contractually bears the cost of technical obsolescence and the loss of service potential on the external service provider's assets on hand at the end of the initial contract term, either in the form of an opportunity cost or as a direct financial cost. Omitting this adjustment distorts the evaluation as the Commonwealth's financial exposures under the outsourcing option are not fully captured in the financial evaluation report (refer discussion at paragraphs 7.38–7.39 in report).

Recommendation No. 15

ANAO recommends that, to ensure competitive neutrality adjustments are consistent with the conditions on which tenderers' pricing is based, OASITO, in consultation with DOFA, review the methodology to be applied in future IT outsourcing tenders for the calculation of adjustments for the required rate of return on agency assets in situations where the Commonwealth underwrites the asset risk of tenderers.

DOFA whole-of-government response: Disagree. OASITO has previously reviewed the methodology having regard to asset risk allocation issues and has obtained expert advice that no change to the ROI [return on investment] component of the competitive neutrality calculation is required. This approach is consistent with Government policy on IT outsourcing.

ANAO comment: In ANAO's view, the competitive neutrality adjustment made for operating leases should not be the same as that made for finance leases given that the risks that the Commonwealth bears are materially different in each case. In the case of the leases covered in this audit, ANAO considers that they are finance leases under which the Commonwealth has underwritten the capital risk of tenderers in respect of dedicated assets used in the delivery of the tendered services such that, in normal circumstances, they are not exposed to financial losses on relevant assets (see discussion at paragraphs 7.27–7.29 of report). In view of that obligation, and the commensurately reduced lease pricing offered by tenderers as a result of the lower risk profile resulting from it, ANAO considers that the competitive neutrality rate of return adjustment applied to the agency cost baseline should have reflected a lower notional rate of return requirement. In the case of true operating leases, ANAO would support a higher notional rate of return being required on agency assets as the external service provider has a higher asset risk.

Recommendation No. 16

ANAO recommends that, to assist in the verification of external service providers' reported performance, its compliance with contractual obligations, and as an aid to effective contract and resource management, relevant agencies consider the formulation and implementation of an independent review and evaluation program as soon as practicable in the term of an IT outsourcing arrangement.

DOFA whole-of-government response: Agree. Agencies will continue to develop mechanisms and processes to ensure effective contract management, having regard to the costs and anticipated benefits of introducing additional layers of review.

Recommendation No. 17

ANAO recommends that, in managing IT outsourcing agreements, relevant agencies develop procedures for the conduct and documentation of the processes followed in evaluating options for the use of contractually-available service credits to facilitate effective delivery by the external service provider of contracted services.

DOFA whole-of-government response: Agree with qualification. Agencies will continue to pursue a flexible, outcomes-oriented approach for the exercise of service credits and other contractual mechanisms, with an emphasis on encouraging good contractor performance. It should be acknowledged that agencies may responsibly take decisions to redirect or reprioritise contractor resources to address the business needs of the agencies.

Recommendation No. 18

ANAO recommends that, where appropriate in outsourcing IT infrastructure services, agencies develop, in consultation with the Defence Signals Directorate, an integrated security architecture strategy that addresses operational security issues, identifies the necessary security safeguards and the required timetable for their implementation by the external service provider.

Department of Defence: Agree. The report is fully consistent with the experience of DSD's Information Security Branch in supporting IT outsourcing initiatives, particularly the Cluster 3 and ATO exercises. DSD intends to work closely with the forthcoming Cluster 1 and Cluster 10 initiatives to apply the lessons, especially Recommendation 18, concerning integrated security architectures. DSD is also intending to establish a scheme whereby commercial IT security consultants can be accredited as being able to interpret and apply government standards—this should be of great value to Commonwealth agencies.

DOFA whole-of-government response: Agree. Security requirements have been addressed with the assistance of Defence Signals Directorate in all tender processes conducted under the Initiative having regard to existing security arrangements in the relevant agencies. The development of group security policies is considered on a case by case basis having regard to both existing security arrangements and the contractual framework for each Group.

Recommendation No. 19

ANAO recommends that, in implementing IT outsourcing arrangements, relevant agencies develop a specific strategy for monitoring external service providers' compliance with contractual privacy obligations.

Privacy Commission: Agree. If contractual clauses are to deliver effective privacy protection there needs to be a mechanism in place to ensure that both parties meet their privacy obligations.

DOFA whole-of-government response: Agree. IT service agreements provide a rigorous regime for compliance with privacy obligations. Monitoring of compliance with these obligations is a matter for responsible agencies.

Recommendation No. 20

ANAO recommends that, in future IT outsourcing processes, relevant agencies:

a) ensure that the capacity of tenderers to provide the invoicing information and associated documentation required to support the approval of Commonwealth payments and agency budgetary purposes is appropriately assessed during the tender evaluation and transition phases;

b) specify in the outsourcing Agreement threshold invoice requirements that must be met before payment can be made; and

c) consider including in the transition milestones and deliverables required to be met in order for the external service provider (ESP) to receive full payment of transition fees, a requirement that the ESP demonstrate adequate capacity to provide invoicing that will satisfy the specified threshold requirements.

DOFA whole-of-government response:

– Part (a): Agree, tender evaluations now place greater emphasis on these matters in light of the experience of earlier groups.

– Part (b): Agree with qualification. Any threshold requirements must be flexible to allow agencies to make judgements about the materiality and value of supporting invoice data and materials.

– Part (c): Agree that this requirement should be considered.

The Humphry review

In the light of the Auditor-General’s criticisms, Minister Fahey commissioned a review by Mr Richard Humphry AO. The terms of reference were as follows:

The independent reviewer shall conduct a review (Review) of the Whole of Government Information Technology Outsourcing Initiative (Initiative).

The independent reviewer shall inquire into matters relating to the initiative, with particular emphasis on the implementation risk associated with transitioning the provision of IT Infrastructure from the in-house IT operations of Commonwealth agencies to an external service provider (Implementation Risk) in contracts let under the Initiative to date.

In conducting the Review, the independent reviewer should:

  • report on the implementation of the Initiative to date;
  • identify the sources of Implementation Risk;
  • identify how Implementation Risks are addressed and managed in the context of Initiative tender processes; and
  • raise any other issues related to the scope of this inquiry.

In conducting the Review, the independent reviewer shall assess the experiences to date of contracts let under the Initiative having regard to the following materials:

  • the Auditor-General’s Report in relation to the implementation of the Initiative (ANAO Report Number 9 of 2000-2001);
  • the collective response to the recommendations of the ANAO Report agreed by all Commonwealth agencies affected by the contracts audited in the ANAO Report;
  • the views of Commonwealth agencies and the relevant contractors that have participated in contracts let under the Initiative to date as appropriate; and
  • any additional materials the independent reviewer considers necessary to conduct the Review.

As a priority, the independent reviewer shall conduct a review of the Group 1 and Group 11 tender processes currently at market. Specifically, the independent reviewer shall:

  • identify Implementation Risks associated with each of these tender processes; and
  • provide an opinion that these Implementation Risks have been adequately addressed in each of the tender processes.

The independent reviewer is to report to the Minister for Finance and Administration by the end of December 2000. He will also have access to a steering committee comprised of the Secretary of the Department of Prime Minister and Cabinet; the Secretary of the Department of Finance and Administration; and the Chief Executive Officer of the Office of Asset Sales and IT Outsourcing.

The Humphry report, making the following recommendations, was publicly released on 12 January 2001. The Government’s response to each recommendation follows in italics.

Recommendation 1

While it is the prerogative of the Government to set overall direction, the introduction of the FMA and CAC Acts places responsibility for implementation of policies with Chief Executives and Boards. Accordingly future responsibility for implementing the Initiative should be fully devolved to agency Chief Executives or Boards.

Agree: The Government will retain the policy objectives of the IT Initiative including value for money information technology (including savings) and the development of the Australian IT & T Industry. The Government accepts the recommendation to devolve the responsibility for implementing the initiative to agency Chief Executives or Boards. The Department of Communications, Information Technology and the Arts will retain responsibility for the industry development component of this initiative.

Recommendation 2

The appropriateness of a particular outsourcing model will depend on individual agency requirements. The decision as to which model to adopt should be taken by the agency Chief Executive or Board in accordance with their responsibilities under the FMA and CAC Acts.

Agree: Agencies can now determine the appropriate model/s for outsourcing within the bounds of the Government’s IT initiative.

Recommendation 3

To ensure that the Government’s IT outsourcing policy is pursued diligently, the outcomes of the policy need to be included in the performance agreements of agency heads. A committee of Secretaries should be formed to monitor the ongoing progress of the policy. This committee would report progress on a Whole of Government basis.

Agree with qualification: The outcomes of implementing the policy will be included in the performance assessments of agency heads. For Secretaries, consistent with the current procedure, the Secretary of the Department of the Prime Minister and Cabinet and the Public Service Commissioner will assess and report on this aspect of their performance to Ministers, drawing on advice of outside experts as appropriate. For other agency heads, similar arrangements should be put in place by the relevant Boards and / or Ministers. The Public Service Commissioner will report on progress of the implementation of the initiative annually in the "State of the Service" report. Similarly, agencies not in the scope of the Commissioner’s report will need to advise on progress in their Annual Reports.

Recommendation 4

When current IT outsourcing contracts expire, there is little benefit in mandating that agencies adhere to their existing groups. Within the overall government policy to outsource, agencies should exercise their own discretion on how to approach re-tendering or contract renewal.

Agree: Agencies will more than likely continue to seek economies of scale through groups at their own discretion.

Recommendation 5

It follows from recommendations 1-4, that although OASITO has been an important and necessary catalyst for change and moving the Initiative from a point of inertia to realisation, it is no longer appropriate for them to continue with their centrally managed role. However, OASITO has significant experience in the formal process of government contracting for outsourcing and should continue to be available to agency heads as a reference point for procedural aspects.

Agree with qualification: See response to recommendation 1 with respect to devolved management of the Initiative. In practice, under the devolved management model, expertise in IT outsourcing will no longer reside in OASITO. Such expertise will increasingly be located in agencies active in the outsourcing process. In any case, a mature market has emerged from which agencies can source this type of advice. However, a six month transitional arrangement will be put in place whereby OASITO will provide assistance on IT outsourcing at the request of agency Chief Executives or Boards. After the transitional period, agency Chief Executives or Boards will obtain assistance at their discretion if required from a source of their own choosing.

Recommendation 6

There is a need for agencies to receive support from a separate organisation in managing transition and implementation of IT outsourcing. It is essential that such a supporting body adopts the nature of a service organisation, acting as a central repository of skill and knowledge — accessible to agency heads or governing bodies in implementing IT outsourcing. Consideration should be given to the portfolio location of such a body.

This group could draw on OASITO’s experience.

Agree with qualification: It has always been the responsibility of agency heads to manage the transition to IT outsourcing. The Government will establish a body to advise agencies, at their request and on a fee for service basis, in managing the transition of IT functions to the private sector. This body will reside in the Department of Finance and Administration.

Recommendation 7

Subject to an assessment of the Commonwealth and bidder positions on Group 1:

  • the outsourcing process for Centrelink should not proceed until the Centrelink Board is satisfied that the transition and implementation risks can be effectively managed. Subject to that assessment, Centrelink should proceed to outsource its IT infrastructure within the overall government policy to outsource, and should exercise its own discretion on what should be outsourced and the manner in which that outsourcing should take place; and
  • the Department of Family and Community Services (FaCS) should continue with outsourcing its IT infrastructure within the overall government policy to outsource, exercising its own discretion on what should be outsourced and the manner in which that outsourcing should take place.

Agree: This recommendation can be implemented within the legal and probity framework for the tender process for Group 1. Centrelink and FaCS will assume responsibility for the current tender process for Group 1. The Secretary of FaCS and the Chief Executive Officer of Centrelink will be held accountable for implementing the Government’s policy through assessment of their performance (see recommendation 3).

Recommendation 8

Subject to an assessment of the Commonwealth and bidder positions:

Group 11 should not proceed until the Chief Executives of each agency are satisfied that the implementation risks have been adequately addressed. Subject to that assessment, agencies should proceed to outsource their IT infrastructure within the overall government policy to outsource, but should exercise their own discretion on what should be outsourced and the manner in which that outsourcing should take place.

Agree: This recommendation can be implemented within the legal and probity framework for the tender process for Group 11. Secretaries and agency heads will assume responsibility for the current tender process for Group 11, and will be held accountable for implementing the Government’s policy through assessment of their performance (see recommendation 3).

Recommendation 9

Group 9 should not proceed until the Chief Executives of each agency are satisfied that the implementation risks have been adequately addressed. Subject to that assessment, agencies should only proceed to outsource their IT infrastructure within the overall government policy to outsource, subject to careful decision on what, if any, elements should be outsourced.

Agree: Secretaries and agency heads will be held accountable for implementing the Government’s policy through assessment of their performance (see recommendation 3).

Recommendation 10

Group 10 should not proceed until the Chief Executives of each agency are satisfied that the implementation risks and security concerns have been adequately addressed. Subject to that assessment, agencies should proceed to outsource their IT infrastructure within the overall government policy to outsource, subject to careful decision on what, if any, elements should be outsourced.

Agree: Secretaries and agency heads will be held accountable for implementing the Government’s policy through assessment of their performance (see recommendation 3).

Key events

Date Event
12 March 1991 The Hawke Government’s industry statement, Building a competitive Australia, announces a greater role for the private sector in the provision of IT services to the public service.
1 March 1995 Clients First: the challenge for Government information technology, the report of the Minister for Finance Information Technology Review Group, identifies several issues that would need to be considered in the event of IT outsourcing.
January 1996 Industry Commission’s Competitive Tendering and Contracting by Public Sector Agencies advocates greater use of outsourcing by the Commonwealth.
June 1996 Report of the National Commission of Audit suggests the outsourcing of IT services.
11 February 1997 Department of Veterans’ Affairs announces it is the first Commonwealth agency to outsource its desktop to mainframe computing infrastructure. (Bruce Scott MP, media release 13/97)
25 April 1997 Minister Fahey announces a whole-of-government policy of outsourcing departments’ IT infrastructure. (John Fahey MP, media release 16/97)
May 1997 In anticipation of savings, the Government reduces the forward estimates of agencies by:
  • $37.9 million in 1998–99
  • $87 million in 1999–2000
  • $99.2 million from 2000–01

Savings in excess of these amounts could be retained by agencies, but they would have to make up any shortfall. (Auditor-General’s report, p. 42, available at www.anao.gov.au)

24 July 1997 First ‘cluster’ of agencies (Cluster 3) to outsource its IT needs is announced. (John Fahey MP, media release 37/97)
30 July 1997 Reinecke Consulting and Cutler & Company are appointed as industry development advisers, to establish criteria in tendering process for achieving industry development objectives. (John Fahey MP, media release 40/97)
August 1997 Defence Signals Directorate, the Attorney-General’s Department and the Office of Government Information Technology release IT Infrastructure Security Framework for Outsourcing.
18 September 1997 Department of Finance and Administration appoints IBM-GSA for 5 years contract to provide mainframe, mid-range computer processing, network and desktop infrastructure and support services. This involves an extension of the contract with the Department of Veterans’ Affairs. It is expected to save DOFA $25 million over 5 years. (John Fahey MP, media release 53/97)
30 September 1997 The draft request for tender for Cluster 3 is released. (John Fahey MP, media release 59/97)
November 1997 The Government transfers responsibility for its Information Technology Infrastructure outsourcing program from the Office of Government Information Technology (OGIT) to the Office of Asset Sales, renaming the organisation the Office of Asset Sales and IT Outsourcing (OASITO).
November 1997 Senate Finance and Public Administration References Committee’s Contracting Out of Government Services: First Report—Information Technology advocates more agency control and expresses concern about confidentiality clauses and privacy.
22 December 1997 Customs announces it will outsource its IT infrastructure to EDS. (Warren Truss MP, media release)
22 December 1997 The timetable for IT outsourcing is announced. (John Fahey MP, media release 87/97)
23 February 1998 The request for tender for the Department of Employment, Education and Youth Affairs and Employment National is released. (John Fahey MP, media release 7/98)

However, no tender is awarded. (John Fahey MP, media release 54/98)

5 March 1998 Computer Sciences Corporation Limited is announced as the preferred tenderer for Cluster 3. (John Fahey MP, media release 11/98)

Five year contract is signed on 31 March 1998. (OASITO Annual Report 1998–99)

28 May1998 The request for tender for Group 5 is released. (John Fahey MP, media release 49/98)
7 August 1998 Request for tender for the Australian Taxation Office is released. (John Fahey MP, media release 75/98)
October 1998 OASITO is advised that the timetable for implementation would outstrip industry’s ability to bid competitively. (See Auditor-General’s report, p. 55, available at www.anao.gov.au)
30 November 1998 Request for tender for Health group is released. (OASITO Annual Report 1999–2000)
December 1998 OASITO advises the Minister for Finance and Administration of problems that have emerged and advises of ‘a need for greater clarity as to the underlying intent of the Initiative, as well as the respective roles to be played by OASITO and the agencies involved in each tender.’(Auditor-General’s report, p. 43, available at www.anao.gov.au)
22 December 1998 The Prime Minister advises Portfolio Ministers that ‘as a general Government policy, outsourcing of IT infrastructure services should proceed unless there is a compelling business case on a whole-of-government basis for not doing so. I attach a high importance to the early implementation of this Initiative.’ (quoted in OASITO Annual Report 1998–99, p. 31)
January 1999 Minister for Finance and Administration issues revised guidelines regarding the respective roles of OASITO and agencies. The coordination and management role of OASITO is strengthened and clarified in some areas, including the role of financial evaluation. (Auditor-General’s report, p. 43, available at www.anao.gov.au)
12 March 1999 EDS is announced as the preferred tenderer for the ATO, with projected savings of $100 million over five years. (John Fahey MP and Senator Alston, media release 14/99)

Five year contract is signed on 31 March 1999. (OASITO Annual Report 1998–99)

12 March 1999 Request for tender for Group 8 is released. (OASITO Annual Report 1999–2000)
26 March 1999 Advantra is announced as the preferred tenderer for group 5. (media release 18/99) Five year contract is signed on 14 April 1999. (OASITO Annual Report 1998–99)
March 1999 Auditor-General’s investigation commences.
28 April 1999 Request for proposals for Group 1 released. (OASITO Annual Report 1999–2000)
23 September 1999 IBM GSA announced as preferred tenderer for Health group. (OASITO Annual Report 1999–2000)
15 December 1999 Request for tender for Group 1 released to pre-qualified tenderers (OASITO Annual Report 1999–2000). No decision made on tenderer before Humphry review.
23 December 1999 Ipex IPG announced as preferred tenderer for Group 8. (John Fahey MP and Senator Richard Alston, media release 87/99)
June 2000 Six of the twelve major tenders planned under the initiative are completed, with five resulting in executed agreements.(Auditor-General’s report, p. 12, available at www.anao.gov.au)
8 August 2000 Minister for Finance and Administration refutes suggestions that outsourcing would compromise the CSIRO’s capacity for scientific research. (John Fahey MP, media release 44/00)
29 August 2000 Minister for Finance and Administration and the Minister for Industry, Science and Resources announce that the Government has tasked OASITO to undertake a study in consultation with CSIRO and the other Group 9 agencies to ensure the scope of outsourcing is practical for the science agencies. (John Fahey MP and Senator Nick Minchin, media release 49/00)
6 September 2000 Auditor-General’s Implementation of Whole-of-Government Information Technology Infrastructure Consolidation and Outsourcing Initiative criticises aspects of the management of IT outsourcing. The Department of Finance and Administration provides a formal whole-of-government response which criticises aspects of the report. (Report, including government response, available at www.anao.gov.au)
12 September 2000 Request for tender for Group 11 is released (the Department of Employment, Workplace Relations and Small Business; the Department of Education, Training and Youth Affairs; the National Library of Australia; the Australian Securities and Investments Commission and the Department of the Treasury). (John Fahey MP, media release 50/00)

No decision made on tenderer before the Humphry review.

7 November 2000 Minister Fahey announces a review of IT outsourcing by Mr Richard Humphry. The review is to focus on to identify and assess the implementation risks to be managed when transitioning from in-house IT operations to an outsourced environment managed by an external service provider. (John Fahey MP, media release 63/00)
14 November Minister Fahey releases the terms of reference for the Humphry review (see above) (John Fahey MP, media release 67/00)
29 November 2000 Inquiry into IT outsourcing is referred to the Senate Finance and Public Administration References Committee.
12 January 2001 Minister Fahey releases the Humphry Review and the Government’s response to the recommendations. The recommendations and Government response are listed above, and also available as an attachment to John Fahey MP, media release 01/01.

Responsibility for outsourcing IT services is to be transferred to the agencies affected (including Groups 1 and 11). OASITO is to provide assistance over a six month transitional period. A new body, to reside in the Department of Finance and Administration, will assist agencies on a fee for service basis.

31 January 2001 Centrelink announces that, along with the Department of Family and Community Services, it has discontinued the Group 1 tender process. Centrelink’s Board is to examine how to implement the Government’s outsourcing policy, and the Department is to issue a new request for tender for its own IT needs. (Centrelink media release)
22 May 2001 OASITO renamed the Office of Asset Sales and Commercial Support, effective 1 July 2001 (DoFA Portfolio Budget Statements 2001-02)

Key links

Home page of the Department of Finance and Administration (http://www.dofa.gov.au)

Recent and archived media releases from the Minister for Finance and Administration (www.dofa.gov.au)

Humphry Review

http://www.dofa.gov.au/humphryreview/.

Office of Asset Sales and IT Outsourcing (http://www.oasito.gov.au/)

OASITO is an executive agency of the Finance and Administration Portfolio. It operates separately from the Department of Finance and Administration, and reports directly to the Minister for Finance and Administration. Details about clusters and tenders can be found in OASITO’s annual reports, which are available at this site.

Senator Kate Lundy, Shadow Minister Assisting the Shadow Minister for Industry, Innovation and Technology on Information Technology (http://www.katelundy.dynamite.com.au/)

The Australian National Audit Office

(http://www.anao.gov.au)

The Senate Standing Committee on Finance and Public Administration

(http://www.aph.gov.au/senate/committee/fapa_ctte/index.htm)

The Outsourcing Centre

(www.outsourcing-centre.com)

 

For copyright reasons some linked items are only available to Members of Parliament.

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