Contracting out of Government Services - Information Technology

EXECUTIVE SUMMARY

The contracting out of the provision of goods and services is a longstanding practice of all Australian governments. Its use has been increasing in recent years as governments seek to control public expenditure and maximise its efficiency. The current process of outsourcing IT had its origins in the policy of the previous government which in 1991 required all Commonwealth agencies to examine all new and existing services with a view to outsourcing. The committee supports, in principle, the use of market testing and, where the agency can demonstrate a sound business case, outsourcing where it holds out the opportunity of providing IT services to, or on behalf of, the Commonwealth more cost-effectively and/or more efficiently than in-house provision. Commonwealth requirements cannot be considered solely in simple cost terms. A number of public policy issues must be addressed when contemplating outsourcing, particularly the proper accountability for the expenditure of public money and the provision of services, the protection of the privacy of the citizen, the probity of the process, the impact on employment and local industry. The Commonwealth also has a legitimate interest in the practices of the potential contractor in areas such as employment equity.

In its very comprehensive review of this subject the Industry Commission noted the potential benefits of outsourcing with the rider, 'when done well'. That qualification echoes the concern of the committee. To 'do' outsourcing well requires a considerable investment of time, money and expertise. A recurring theme of the literature on outsourcing is that it is not a panacea nor a convenient 'quick fix' for a failing in-house system and that the benefits may be realised in areas other than cost saving. Agencies need a very clear grasp of the services they require and of their costs before they can proceed to the market. Thus the in-house service should be at a high level of efficiency before market testing is undertaken otherwise the agency will not be able to make a valid assessment of the tenders it receives. In evidence to the committee that point was made repeatedly.

The committee has avoided trading examples of successful or failed outsourcings. The literature offers numerous examples of both. The lesson to be drawn from these examples is, in the words of the Treasury, that 'outsourcing poses major business and management risks without, in all cases, certain financial gains'. The committee was reassured by the level of understanding within the Australian Public Service (APS) of the elements necessary to make outsourcing work. The work of agencies such as the former Department of Administrative Services in refining the acquisition process, the Audit Office in reviewing both the process and outcomes, the Performance Improvement Group within the Department of Finance and the Management Advisory Board has contributed to a considerable body of expertise and analysis within the APS. Some agencies also commented on the valuable work being done by the Office of Government Information Technology (OGIT) in coordinating the whole of government approach to outsourcing.

Based on the coordination comments to the Cabinet submission and evidence to this committee it is clear that agencies recognise the advantages of benchmarking and market testing in improving the efficiency with which IT services are delivered. None ruled out outsourcing as an option.

In the committee's view it is absolutely vital that agencies be given the time, resources and an appropriate policy framework to pursue market testing with a real option to reject outsourcing if it does not offer genuine benefits to the agency.

A number of aspects of the current proposal were criticised by agencies in their coordination comments to the April Cabinet submission on this subject. Comments focussed on cost and savings estimates. Agencies were concerned that uncertainty surrounding transition and redundancy arrangements for staff could have a serious impact on the savings estimates. They were also concerned that the amounts agencies could be expected to save were estimated on the basis of inadequate data and failed to have regard to the varying levels of efficiency in agencies' IT services. By applying across the board savings targets some agencies believed that those with efficient IT services and little genuine scope to make savings would be penalised. Agencies also expressed concern that the costs of the market testing/outsourcing process were not taken into account in calculating potential savings.

The committee notes that decisions since the savings were announced in the May budget may have an impact on the estimated savings. For example the employment transition model announced by the Commonwealth will be more costly than that used in estimating savings; the reduction in the size of cluster three following the withdrawal of the Australian Securities Commission, the Department of Finance and elements of the former Department of Administrative Services may reduce the economies of scale available to that cluster; and requirements for local industry participation (while supported by the committee) may have an impact on the prices major contractors are able to offer.

The committee is concerned that by locking in the savings in the next three financial years and requiring that agencies meet those savings targets irrespective of the outcome of their market testing/outsourcing decision there is a risk that agencies will be pressured into outsourcing merely as a cost saving measure

A number of agencies were critical of the centralised approach being taken to IT outsourcing which is in contrast with the general thrust of government policy to decentralise responsibility to agencies. The cluster approach which is central to the savings strategy and to achieving a greater degree of standardisation and coordination of IT services was also criticised as having the potential to stifle innovation and limit agencies flexibility to respond to the changing IT environment. The committee also notes the potential for the clustering strategy to restrict the government's capacity to make machinery of government changes within the life of a contract. Clusters, by consolidating agency requirements into a small number of prime contracts may also make it difficult for Australian small and medium enterprises (SMEs) to participate in the process. The committee notes that this issue has been addressed in the Request for Tender for Cluster 3 but it has not had the opportunity to consider it in detail.

In-house bidding, a process by which a team established within an agency can put together a bid for the agencies IT contract, has been successfully used by the Department of Defence in supplying IT services. While there are advantages and disadvantages to the in-house bid it is an option that should be supported. In-house bids are not opposed by the government however the current process offers little support to them. The RFT for Cluster 3 specifically excludes in-house bids.

The committee believes that a more agency centred process in which individual agencies could adopt the approach to market testing and outsourcing which best suits their objectives would offer a better prospect for successful outcomes. It would permit agencies to adopt approaches which suited their particular business needs and allow a greater range of options including in-house bid and selective sourcing. This would not preclude any of the features of the current process but would leave to the agencies themselves the decision on how to proceed. It would be more consistent with the government's intention to decentralise authority for agency management within the Australian Public Service.

The committee is obviously concerned about the loss of jobs which may result from outsourcing. However there is a large degree of uncertainty about the probable level of job losses as a result of IT outsourcing. IT is a booming area of the economy and IT workers are not unskilled. Estimates of possible losses in this process have varied from approximately 40 per cent to zero. The committee does not believe that potential job losses are a sufficient reason not to proceed with market testing. The committee also notes that other approaches to achieving efficiency gains and/or cost savings have resulted in job losses.

The committee supports the government's intention to ensure that a reasonable share of the business generated by outsourcing goes to Australian SMEs. The committee did not receive a copy of the Cluster 3 request for tender in sufficient time to consider the local industry development requirements in any detail. In summary, tenderers for the cluster will be required to commit to two distinct industry development initiatives during the term of the contract; those that are directly related to the services agreement and, secondly, those separate from the requirements of the services agreement. These commitments will be performance obligations under the Service Agreement. The committee notes that industry has expressed reservations about the use of binding agreements. One organisation has described them as a return to 1980s style offset agreements. The committee will seek further discussions with government and industry on the industry development strategy and comment on it in its second report.

A major concern with the possible outsourcing of IT is the protection of the privacy of information provided by the public to the Commonwealth that will be held by private contractors. The Commonwealth's existing privacy legislation does not extend to the private sector. The committee notes that the Cluster 3 RFT requires information to be held in accordance with the privacy principles of the Commonwealth Privacy Act 1988 and that the government intends to amend the Privacy Act to cover Commonwealth information held by private contractors. The committee believes that the necessary legislative amendments should be passed before the completion of the outsourcing of any of the clusters. The committee will consider the issue of privacy in greater detail in its second report.

Public accountability for services provided to or on behalf of the Commonwealth by private contractors has received more attention in the committee's general inquiry than specifically with regard to IT. The committee believes strongly that contracting out of services should not diminish public accountability through the Parliament, the Auditor-General and what can be summarised as the administrative law - the role of statutory officers such as the Commonwealth Ombudsman, the operations of agencies such as the Administrative Appeals Tribunal and legislation such as the Administrative Decision (Judicial Review) Act. It has been suggested that contracting out may improve accountability by requiring services to be defined more precisely and imposing service agreements on providers. That should be seen as a bonus not an alternative.

There has also been considerable discussion of the use of secrecy provisions and claims of commercial-in-confidence claims with regard to the contractual relationship. The committee recognises that confidentiality is an essential part of a fair tendering process and is also necessary to protect the genuine commercial interests of contractors. However the committee believes that the need for confidentiality should be interpreted as narrowly as possible to ensure that the maximum amount of information is in the public domain. For example evidence to the committee suggested that only very limited parts of a contract need to be protected after the tendering and contract process is complete. Thus contracts should be published with commercially sensitive information excised rather than kept secret in their entirety to protect a small part of them. Parliamentary committees can also use in-camera hearings to enable their members to examine confidential material.