Outsourcing has been a key feature of the changing Australian public sector environment and has raised important questions of accountability. The concepts underlying the outsourcing of infrastructure such as information technology (IT) are conceptually similar to PPPs in that, under a PPP contract, the emphasis is similarly on the purchase of services rather than the procurement of an asset. Consequently, lessons learnt from outsourcing initiatives raise important issues to consider in the context of PPPs, particularly in relation to accountability for results achieved, or not achieved as the case may be.
The outsourcing of IT infrastructure in the Commonwealth sphere in Australia arose from a government decision known as the IT Initiative, which was to transfer around $A4 billion of IT provision in Federal agencies to the private sector. The then Office of Asset Sales and Information Technology Outsourcing (OASITO) managed the Initiative centrally for the government through a series of tenders dealing with groupings of agencies (clusters). These clusters were determined without adequate consultation and involvement of the agencies concerned and were, in effect mandated, as opposed to agencies being allowed voluntary participation in groupings with accepted synergy and shared purpose. The scope of services to be included in each outsourcing tender was also mandated.
The arrangement posed significant problems of corporate governance for those agencies where the IT requirement was predominantly scientific or otherwise related to the core activities of a particular agency (for example, the payment of pensions). The approach taken by OASITO was designed to implement the Government's policy agenda under centralised direction (and control) despite the perceived reluctance (buy-in) of some agency Chief Executive Officers (CEOs) because they did not have the degree of control necessary to best manage transition risks though they remained ultimately responsible for the agency outputs and outcomes and the budgets involved.89 There was no evidence to indicate that public servants were not endeavouring to implement the Government's outsourcing policy. The question was more apparently to find the best way of meeting all the Government's requirements, including legislative imperatives, and their accountability for agency performance.
A performance audit of the IT Initiative undertaken by ANAO identified that the financial evaluation methodology applied in the tenders did not allow for two key factors that were material to the assessment of savings arising from outsourcing the services. The evaluations considered neither the service potential associated with agency assets expected to be on hand at the end of the evaluation period under the business-as-usual case (which had similarities to the public sector comparator in a PPP evaluation), nor the costs arising from the Commonwealth's guarantee of the external service provider's (ESP) asset values under the outsourcing case. ANAO also found that the competitive neutrality adjustments applied to agencies' business-as-usual cost baselines did not appropriately reflect the lower business risk faced by private sector tenderers under the finance leasing arrangements offered, and the commensurately lower equipment lease pricing included in their bids.90 Consequently, the financial savings realised by the agencies from outsourcing, as quantified in the tender evaluations, were overstated.91
The ANAO identified a range of issues on which agencies should place particular focus in the management of IT outsourcing arrangements as follows:
● identification and management of 'whole of contract' issues including the retention of corporate knowledge, succession planning, and industrial relations and legal issues;
● the preparation for and management of, including expectations from, the initial transition to an outsourced arrangement, particularly when a number of agencies are grouped together under a single agreement;
● putting in place a management regime and strategy that encourages an effective long term working relationship with the ESP, while maintaining a focus on contract deliverables and transparency in the exercise of statutory accountability and resource management requirements;
● defining the service levels and other deliverables in the agreement so as to focus unambiguously on the management effort of both the ESP and agencies on the aspects of service delivery most relevant to agencies' business requirements; and
● the ESP's appreciation of, and ability to provide, the performance and invoicing information required by agencies in order to support effective contract management, as well as from both an agency performance and accountability point of view.
As a response to the audit, the Government commissioned a review of IT outsourcing conducted by Richard Humphry (Managing Director, Australian Stock Exchange). This independent review recognised the implicit management dilemma described above and recommended that, because CEOs of agencies had the statutory responsibility, they should be responsible for the outsourcing decisions. In particular, decisions that impacted upon the core business of the agency needed to be taken at agency level. Mr Humphry remarked:
Priority has been given to executing outsourced contracts without adequate regard to the highly sensitive risk and complex processes of transition and the ongoing management of the outsourced business arrangement.92
The review pointed out that there were several risk management lessons to be learned as follows:
● the most significant risk factors were the unwillingness to change and the failure to buy-in the appropriate expertise;
● there was a lack of focus on the operational aspects of implementation;
● there was insufficient attention paid to the necessary process of understanding the agencies' business; and
● there was insufficient consultation with key stakeholders.93
The review drew heavily on the Standards Australia publication HB 240:2000, Guidelines for Managing Risk in Outsourcing.
The Government agreed with the ten recommendations made by the review, some with qualification.94 This agreement included that responsibility for implementation of the IT Initiative be devolved to Commonwealth agencies in accordance with the culture of performance and accountability incorporated in the relevant financial management legislation. Agencies are required to obtain value for money (including savings) and maximise Australian industry development outcomes. Agency heads will be held directly accountable for achieving these objectives within a reasonable timeframe, as well as grouping with other agencies at their discretion, wherever possible, to establish the economies of scale required to maximise outcomes.
Agencies will also be responsible for addressing implementation risks. A separate body will be established within the Department of Finance and Administration (Finance) to advise agencies, at their request and on a fee for service basis, on managing their transition. Audit experience indicates that the agency emphasis has to be on developing a robust analysis of business requirements at the initial stage, which would be the basis of a strong business case for whatever IT strategy is developed. Without OASITO's involvement, the industry can now deal directly, from the outset, with the people responsible for the function and related outputs and outcomes, as well as with those who will be managing the contract. The inability to have this relationship was the subject of criticism by the industry under the previous arrangements managed by OASITO. This is a significant lesson for all future outsourcing arrangements.
Following the tabling of the ANAO audit report, the Senate Finance and Public Administration References Committee announced an inquiry into the IT Initiative. The Committee's August 2001 report found that the sheer size of the implementation task was ambitious and that the Initiative introduced substantial risks in its own right. The Committee noted that its deliberations had been greatly assisted by the analyses and recommendations set out in the Audit Report. Acknowledging that the Government had taken heed of the majority of the recommendations emanating from the Humphrey Review, the Committee made further recommendations designed to strengthen accountability and increase transparency in contractual dealings.95 The Committee noted that its report highlighted failures in achieving projected cost savings, difficulties experienced in transition to total outsourcing, and other matters, particularly those related to documentation of results. More positively, the Committee also found agencies that have succeeded in building genuine partnerships with their providers and have consequently set standards to which both agencies and business should work.96
Advocates of outsourcing point to the opportunities offered in terms of increased flexibility in service delivery; greater focus on outputs and outcomes rather than inputs; freeing public sector management to focus on higher priorities; encouraging suppliers to provide innovative solutions; and cost savings in providing services.97 Similar benefits are often cited from the use of PPP-type arrangements. However, all such arrangements also bring risks to an organisation which cannot be ignored. The experience of the ANAO has been that a poorly managed outsourcing approach can result in higher costs, wasted resources, impaired performance and considerable public concern.98 An important issue is whether there is sufficient transparency in the arrangements to satisfy Parliament's concerns about accountability both for the use of public resources and the results being achieved.