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.
