OUTSOURCING OF COMMONWEALTH INFORMATION TECHNOLOGY REQUIREMENTS

FIRST REPORT ON THE CONTRACTING OUT OF GOVERNMENT SERVICES
DISSENTING REPORT FROM SENATORS FERRIS, LIGHTFOOT AND WATSON

November 1997

DISSENTING REPORT

This Dissenting Minority Report expresses the firm view of the Coalition members of the committee that the Majority Report on this reference is fundamentally flawed in both its approach to the subject matter and the use of evidence available to the committee.

There are a number of areas relating to the conduct of the inquiry which Coalition members are particularly concerned about.

Conduct of the Inquiry

The entire premise of this inquiry has been flawed from the start because certain members of the committee appeared determined to not be open minded in relation to the terms of reference.

A mindset of fundamental opposition to the entire concept of outsourcing had the effect of turning this inquiry into an ideological debate rather than a constructive examination, the results of which the Commonwealth could have used to hone and improve its ongoing outsourcing process.

The Majority Report appears to have paid scant regard to the fact that outsourcing was adopted as a policy by the previous Government.[1]

Outsourcing is a worldwide trend which has been pursued around the world as Governments and private companies recognise that the maintenance and servicing of their information technology requirements is not their core business and should properly be a service performed for them by others.

Information technology outsourcing has been adopted fully or in part by several Australian State Governments including South Australia, Victoria and Western Australia.

It has also been pursued by a large number of Australian companies including the Commonwealth Bank, Macquarie Bank, Qantas, Telstra, AMP, MMI and Integral Energy. These companies have approached their outsourcing for the same reasons as the Commonwealth, because it is not their core business.

As Dr Macdonald of OGIT reported to the committee,

IT outsourcing has been widely adopted in both government and private sectors with the independent Gartner Group reporting that the global market in 1995 was valued at about $US 18 billion and conservatively predicted that it would rise to $US 40 billion by the year 2000. It is becoming an increasingly common approach to the provision of basic infrastructure services for agencies and allows them to focus on policy and service delivery.[2]

The committee did not hear evidence from any representatives of these State Governments or any of these companies who have decided to outsource.

This Minority Report finds that the Majority Report disregards evidence proposing a positive outcome to IT outsourcing and has made extensive use of extremely selective quoting. For example on page 4, with one of the few positive quotes contained in the Majority Report, the Industry Commission is quoted thus:

When done well, CTC can lead to significant improvements in accountability, quality and cost-effectiveness providing benefits to clients, taxpayers and the broader community.

However, the Majority Report adds emphasis with italics to the words 'when done well' and calls it a 'cautious' view thereby changing the quote from a positive to a negative.

Surely the same can be said for any project, that when it is done well it is good, when done poorly it can be costly or worse?

Evidence

Illegally Obtained Documents

This report deplores and strongly condemns the extensive usage of an illegally obtained Government Cabinet Submission in the conduct of this inquiry.

The use and heavy reliance of such a document in a Parliamentary inquiry sets an extremely dangerous precedent and overtly encourages the theft and 'leaking' of Commonwealth documents.

The ability of a Government to formulate and use confidential material underpins the fabric on which a democracy is built.

If Commonwealth officers, in advising Government and supplying confidential and often sensitive information can expect to have their comments published by the Parliament under their name, in an official report, then naturally those officers will be forced to be more covert and sanitised in their comments. The consequent loss of the confidence in providing what would previously have been frank and constructive comments will have far reaching consequences for Government.

Committee Hearings

This Minority Report condemns the Majority Report's apparent disregard for evidence obtained from Commonwealth officers at the Committee hearings in favour of the co-ordination comments contained in the aforementioned illegally obtained Government document.

This, by action and implication, means that the information obtained in the Inquiry hearings is at best irrelevant, at worst incorrect and certainly that the hearings are a pointless exercise in comparison to the information contained in the Cabinet Submission.

Again, the precedent that this sets for the status of future Senate inquiries is to belittle and disregard the entire hearings process and to thoroughly undermine the workings of parliamentary committees. The public would be well within their rights to ask, in relation to any future inquiries and subsequent reports, 'what status has this report when I am led to believe that officers never tell the truth at these hearings anyway?'.

Another important fact to be aware of when accepting information obtained from a Cabinet Submission is that these submissions are prepared at the start of a process, to assist the Government in making management decisions. In the case of this document, agency co-ordination comments were sought to assist Cabinet in making a decision as to whether to continue Government policy of outsourcing IT. The Cabinet naturally also sought many sources of external advice in coming to an eventual decision.

Officers providing the comments on the Submission were not, nor ever claimed to be experts on outsourcing. They were asked simply what they thought of the idea. At that stage of the process most had had no experience of IT outsourcing.

Many comments were negative, some were positive. But it is important to view the decision in the light of the Government making sound management decisions.

Agency comments received on a Submission suggesting, for example, funding cutbacks are almost always universally negative, but it would be an irresponsible Government which failed to make that sort of decision. Negative co-ordination comments are not unusual and should not be interpreted as a frank rejection of the current outsourcing approach by Government.

Summary

In short, this Minority Report believes that that the fixed mindset of many committee members and the biased process used in the conduct of this inquiry has led to an inherently flawed Majority Report.

Instead of producing a constructive report and recommendations that the Government could have used to improve its ongoing outsourcing initiative, the Majority Report is little more than a cynical political statement which will serve no useful purpose.

This report finds that the Majority Report lacks credibility for a number of reasons. These are namely;

* By far the majority of witnesses were Commonwealth officers, largely lacking in outsourcing experience.

* Most of the evidence obtained from officers at the hearings was largely ignored in favour of an illegally obtained Government working document.

* No evidence was obtained or attempted to be obtained from other Governments or companies who have outsourced their IT, or from major IT companies who would possibly tender for some of the work.

* The inherent active encouragement to break the Crimes Act and steal confidential Government working documents.

COMMONWEALTH REQUIREMENTS

The Commonwealth's IT environment

The current Government has acknowledged the previous Government's Clients First report and built on many of its recommendations. It is fully aware of the need for government to run efficiently and provide value for money to the taxpayer.

As part of its commitment to run an efficient Government for the benefit of taxpayers, it is requiring agencies to focus on their business needs and core activities.

In the information technology arena because the environments are changing so rapidly, this Minority Report agrees with the present and previous Governments that it would be more effective and efficient for the Commonwealth to have these services delivered by the private IT sector.

In the main private providers appear to be better equipped with specific experience and resources and able to deliver the services at a significant saving to taxpayers over current in-house arrangements.

The Government is very confident that the consolidation and outsourcing of IT infrastructure, if proven by a market test, will help address and greatly improve, as pointed out in the Majority Report, the often poorly coordinated and costly systems currently existing across agencies.

It is important to remember that software and systems development are not in-scope in this project.

The Commonwealth's IT requirements

In 1996 the Government conducted a detailed scoping study to consider proposals for long term improvements in the structuring and sourcing of its IT and telecommunications services.

This evaluation highlighted, through an open and competitive process, the overall costs and benefits of a whole of government approach to consolidation and outsourcing of IT infrastructure and the potential savings to agencies from such an approach.

It must be stressed that the consolidation and clustering approach being adopted by the Government enables the delivery of economies of scale within and across agencies.

Evidence given to this committee drew mainly from agencies. It is fair to say that the majority of Commonwealth agencies are apprehensive about outsourcing their IT infrastructure. As pointed out in Clients First, 'The readiness of an organisation to accept outsourcing was affected by cultural considerations above saving costs'[3] and this is where some agencies may need to revise their culture to that of current IT requirements.

APPROACH TO OUTSOURCING

The Centralised Approach

Whilst the Majority Report acknowledges that there is a shortage of personnel within the APS who are skilled in the development of outsourcing tenders and contracts, at the same time it has been critical of the centralised approach that has been taken by the Government.

This Minority Report believes that given the shortage of relevant skills in the APS a centralised approach is the most efficient way to ensure that the relevant skills are best utilised across the public sector, that the use of outside experts is maximised, and that the learning experiences of those involved in the outsourcing process are shared across the public sector.

Clusters

It is acknowledged in the Majority Report that clustering is intended to facilitate the garnering of economies of scale and to reduce the diversity of systems operating throughout Agencies. The twenty-six e-mail systems, nine human resource management systems and twenty different financial management systems as described in Clients First [4] are surely example enough of the need for this.

The ability to have common platforms and desktops across agencies, as well as a process for the interaction of the relevant government IT professionals may enable clustered agencies to work more readily to streamlining processes across government, and having a single entry point to government.

However, to also interpret this as resulting in a stifling of innovation essential to the re-engineering of delivery of government services is unrealistic. With only the day to day processing requirements in-scope for outsourcing the applications development staff remaining in agencies should be able to focus on the re-engineering of business processes.

The Majority Report also expresses concern about the ability of clusters to accommodate machinery of government changes. This is clearly without substantiation. In fact, the history of Cluster 3 supports the ability of clusters to cope with such changes.

Failure to Acknowledge Risks Involved

Before the Cabinet decision to market test for outsourcing of all on-Budget agencies in April 1997, reviews of successful and unsuccessful outsourcing contracts were examined.

Additionally, it was the Industry Statement of the former Labor Government which required all Commonwealth agencies to test the market for the potential outsourcing of all components of their IT platforms.[5] This market testing was to include all applications development and all Commonwealth agencies.

This Government has reduced this requirement by excluding applications unless agencies choose to include it, and requiring only Budget agencies to market test.

The comment of the scale of outsourcing proposed by the Government being unprecedented in size is clearly unrealistic when compared to some of the outsourcing contracts recently let by the Private Sector, i.e.;

Commonwealth Bank and EDS; $5 billion over 10 years, August 1997

Telstra and IBM GSA; $4 billion over 10 years, July 1997

AMP and CSC; $500 million over 10 years, July 1997

Colonial State Bank and Alltel; $530 million over seven years, February 1997

SA Government and EDS; $565 million over nine years, September 1994.[6]

The failure of the Majority Report to use evidence from any private sector companies who have outsourced must account for a great deal of the misinformation in this area.

Managing the Process

This Minority Report finds that the coordinating role of OGIT has ensured the most efficient use of limited resources.

In-house Bids

This Minority Report has sympathy for industry concerns regarding in-house bids.

To suggest that having an in-house bid will give an agency a high degree of certainty about the costs estimated for its own services and is a useful benchmark to assessing external tenders demonstrates the lack of basic understanding of how internal costs will be measured, not to mention competitive neutrality.

As the AIIA put to the Committee;

We take the view that it is extremely difficult to achieve an equitable comparison between bids in-house and externally sourced. Some of our areas of question go to things such as who funds the bid process? If an in-house bid fails, who carries the cost of that failed bid? Do they carry the cost of that bid into the next bid? How are we going to measure the industry development obligations that the government has stated as being a primary objective of the whole outsourcing initiative? How will an in-house bid help regional development and how will an in-house bid specifically help Australian industry development, which the government has placed on the record as being high priorities?[7]

A detailed costing of the internal IT infrastructure costs should be the basis for which all bids, including in-house bids are assessed.

Conclusion

The agency driven approach, the former Government's policy and that favoured by the Majority Report, resulted in the majority of agencies doing nothing - no market testing, no consolidation of IT infrastructure and limited review of internal costs of IT spending.

Clustering and a requirement to market test 'encouraged' by the removal of savings from the forward estimates, simply increases the economies of scale and hence the savings that can be derived from outsourcing.

Any changes that may occur within a cluster that may lead to a change in costs would have occurred anyway. For example, if an agency moves from mainframe to desktop processing, then the change in cost associated with that move will occur regardless of whether it is done internally by the agency, as part of an individual agency outsourcing or as part of a cluster.

EMPLOYMENT ISSUES

In examining the employment issues associated with the decision to outsource, it is important to be aware that information technology is an expanding industry internationally and that qualified and experienced IT workers are becoming increasingly sought after.

ABS statistical evidence shows that employment in the computer industry is increasing at a rate unmatched by any other sector in the country - between June 1993 and June 1996 full-time jobs in the computing services industry rose by 85 per cent around Australia.[8]

The Australian Information Industry Association reported to the committee that,

Employment growth in the industry overall at the moment is about six per cent a year. Our informal surveys of our members indicates a considerable number of vacancies for particular skills ... Our counterpart in the US has reported recently that there are something like 200,000 vacancies in the industry there. I would expect take up rates to be pretty high, but I cannot be absolutely exact about what they might be.[9]

A recent Morgan and Banks survey came to the same conclusion that IT employment was drastically increasing nationally. A newspaper article using these figures and looking particularly at Canberra noted,

As a result of the Federal Government's outsourcing its IT facilities, there was a 53.3% per cent net effect of IT employers in the ACT willing to increase employment, 25.8% above the previous survey figure.[10]

Whilst much evidence is anecdotal, there does seem to be very little unemployment in the information technology industry. It was put to the committee by the Australian Customs Service that;

A very common refrain that we have heard is that the experience of outsourcers is that they struggle sometimes to get the number of staff that they would like to get. Certainly that has been the experience of EDS in relation to South Australia, where they stood in the market place with offers to all staff that were in scope and believed that they could have happily accepted more than they got.[11]

In response to working conditions for staff who may transfer to the successful outsourcer the following excerpt was indicative of the general feeling;

Chair: I would assume that the private sector has less conditions, lower wages and fewer jobs.

Mr Roche: I certainly do not think that the first two are the case. It does not seem to be the experience we have seen to date.[12]

and

Mr Roche: ... it is a question of swings and roundabouts but I think the assessment we have made on what we have heard to date is that the packages taken as a whole on offer to our staff are at least equal, if not better.[13]

There was very little complaint put to the committee in relation to the two transitional approaches for staff, the Clean Break and the Phased Approach. The Clean Break approach, despite the lack of assisted transition to the outsourcer but presumably because of the higher redundancy payments available, appears to be the favoured approach of staff.

The Government's decision announced in early July to free up access to superannuation for in-scope staff addressed concerns arising from the DVA original outsourcing and appears to have been welcomed by staff, as an industrial officer put to the committee;

What the changes have done is to remove that blockage and make the phased approach a more attractive choice in that sense. They have also freed up the opportunities for seeking employment under the clean break a bit more. So that certainly builds significantly greater amount of equity and choice into the system.[14]

INDUSTRY ISSUES

The Government as a client

The Government, in formulating its industry development framework for outsourcing, clearly accepted the view that the Government as a client is an important aspect for Australian companies to pursue global opportunities.

The Finance Minister has stated on several occasions the Government's commitment to industry development through this outsourcing project;

We will be using our purchasing power and the size of our business to support the growth and development of the Australian technology and telecommunications industries, to promote the international competitiveness of those industries and to create growth, employment and development in regional Australia.[15]

Opportunities for Australian SMEs

In the light of the release of the Request For Tender (RFT) for Cluster 3, the key concern the Majority Report raises in relation to SME opportunities in outsourcing is that no set proportion of the value of the contract has been established for SME involvement. No consideration appears to have been given by the committee as to the effects of setting this quota.

If the Government did decide to set a quota, at what level should it be set? What if the Government sets it at a level which is lower than industry would have offered? SMEs will then be cut out of the process. Alternatively, if it is set at a level which is too high it may result in a prime contractor being forced to use SMEs who cannot deliver the serve required, which would impact on the Government's services.

Hence the optimum arrangement is surely to let the competitive process determine the best level of SME involvement that can deliver the best level of service and savings.

Evidently, the Government, in seeking a sanction regime from bidders is not going to allow SME involvements to be watered down in the process.

PRIVACY ISSUES

The Government is evidently sympathetic to citizens concerns in relation to privacy of information held by governments and is committed to ensuring every necessary measure is taken to protect this information.[16]

The previous Government gave no undertakings in respect of privacy, despite outsourcing the Department of Veterans' Affairs IT to Ferntree for a period of five years in 1991. There was nothing about extending the Privacy Act and there were no contractual obligations.

The committee heard strong evidence from agencies concerning procedures to protect individuals' privacy in an outsourced environment.

All agencies that deal with confidential material have fairly high levels of protection on the data that we hold in our computers and that we pass through our communications systems. There are all sorts of access controls password controls, encryption where it is appropriate and so on. ....Those protections will all be in place when we move to an outsourced environment. .....Also, it is probably fair to say that the extent to which outsourcing staff might actually access data is considerably overstated. ....It is not the case that outsourced staff are seeing raw data, that they are sitting there watching personal details come in front of their nose all day. To actually get our data or the tax office data, they have to physically break into that computer system, they have to break through the logical controls in that computer system. Also, on top of all those controls the contracts that we sign with the outsourcers will include deeds of arrangement that cover privacy in the form recommended by the Attorney-General. In relation to security breaches, I draw your attention to section 70 of the Crimes Act, which does apply. Even though it states that it applies to Commonwealth officers, outsourcing staff are in fact caught by the definitions. The penalty for breaching that section is imprisonment for two years. So there are some fairly powerful controls there.[17]

The committee also heard evidence from agencies regarding maintaining individuals' rights to have access to and correct any information held on them.

Mr Roche: The arrangements would not change. There will be the same access by people under FOI that enables them to access records and to make corrections where appropriate.

Mr Seymour: That would be the ATO's understanding too.[18]

The committee was also reminded by the Chief Government Information Officer, Dr Andy Macdonald, that the Minister for Finance had stated in Parliament the Government's commitment to privacy.

I should state firstly that the property remains with the government. The property in the hands of the contractors remains the property of the government. The contracts will provide very stringent obligations to ensure that privacy is protected. But, perhaps even more importantly, the government has made it abundantly clear that it will extend the Privacy Act to cover the contractors, to cover the outsourcers.[19]

A second concern was that the data processing might occur offshore. I can indicate quite clearly that, following further examination of that particular matter, the tender documents will contain provisions that all data processing occurs in Australia.[20]

The HREOC testified that they would not expect the range of privacy risks by employees incorrectly using information as being any different if the same services were being contracted out.[21]

In relation to the monitoring and collating of information relating to breaches of security they gave further evidence that there is no sort of central way of assessing or estimating the total number of security breaches, either currently with agencies or in an outsourced environment.[22]

From this and other evidence received by the committee, this Minority Report is confident that privacy measures are being addressed and will be applied through a number of arrangements. These will include contractual arrangements, current systems already established by agencies and inherited by the contractor, and finally the forthcoming amendments to the Privacy Act.

CONCLUSION

This Minority Report finds that the decision of the Government to pursue IT outsourcing was and is an appropriate one in the current environment of fiscal responsibility and the increasing world wide trend to outsourcing.

Members are satisfied that the Government has sufficiently addressed concerns raised in relation to privacy issues and that the private information held of behalf of citizens will be as secure in an outsourced environment as it is under the present circumstances.

In relation to human resources issues, this Minority Report believes that conditions and transitional arrangements for in-scope staff are satisfactory and notes that the Government has moved to improve access to superannuation contributions for those staff. It also notes the abundant evidence that for most in-scope staff, who are predominantly IT professionals, the access to employment with a private IT company offers an excellent opportunity for career development as well as often improved conditions and payment.

On industry development, this Report finds that the Government has been diligent in its commitment to use this project to promote the Australian IT industry and particularly small to medium sized businesses. Where it would have been simpler to choose contracts on the basis of savings alone it has maintained that all contracts must provide some form of industry development, regional development and employment.

In relation to the Majority Report itself, this Dissenting Minority Report finds that the Majority is wrong and fundamentally flawed in both its approach to the subject matter and the use of evidence available to the committee.

Specifically, the tone of the Majority Report, which appears more as an ideological debate than a constructive critique, is totally rejected by this Report.

It appears absurd that the Majority Report appears to have paid scant regard to the fact that outsourcing was adopted as a policy by the previous Government and has been adopted by governments and private companies around the world.

The fact that the committee did not hear evidence from representatives of these organisations is indicative of the approach of members to the inquiry and the stance and level of debate during its progress.

This Minority Report in the strongest terms condemns the extensive usage of an illegally obtained Government Cabinet Submission in the conduct of this inquiry.

The use and heavy reliance of such a document in a parliamentary inquiry sets an extremely dangerous precedent which ostensibly encourages the theft of Commonwealth documents, and will undermine the confidence Commonwealth agencies and officers can have in providing Government with confidential or sensitive information.

The added consequences of the subsequent disregard of information obtained in the inquiry hearings are the belittlement and disregard of the entire hearings process and thoroughly undermine the workings of parliamentary committees.

Senator Jeannie Ferris Senator Ross Lightfoot Senator John Watson

Senator for South Australia Senator for Western Australia Senator for Tasmania

Footnotes:

[1] Prime Minister of Australia, Building a Competitive Australia, 1991.

[2] Dr A Macdonald, OGIT, Committee Hansard, 4 July 1997, p. F&PA 494.

[3] Clients First , Canberra, 1995, p. 59.

[4] Clients First , Canberra, 1995, pp. 5-7.

[5] Prime Minister of Australia, Building a Competitive Australia, 1991.

[6] David Crowe, 'The bank that ate IT', Australian Financial Review, 14 August 1997, p. 15.

[7] Mr Peter Upton, Australian Information Industry Association, Committee Hansard, 4 July 1997, p. F&PA 531.

[8] ABS Employment Survey (Thursday 16 October 1997)

[9] Mr R Durie, Australian Information Industry Association, Committee Hansard, 4 July 1997, p. F&PA 558.

[10] Lincoln Wright, 'More Work on Offer in IT service sectors', The Canberra Times, 6 August 1997, p. 3.

[11] Mr Mick Roche, Australian Customs Service, Committee Hansard, 4 July 1997, p. F&PA 558.

[12] Mr Mick Roche, Committee Hansard, 4 July 1997, p. F&PA 557.

[13] ibid., p. 568.

[14] Mr George Petrovic, CPSU, Committee Hansard, 4 July 1997, p. F&PA 566.

[15] The Hon John Fahey, House of Representatives Hansard, 25 September 1997, p. 8360.

[16] The Hon John Fahey, House of Representatives Hansard, 28 May 1997, p. 4265.

[17] Mr Mick Roche, Committee Hansard, 4 July 1997, p. F&PA 573.

[18] ibid., p. 547.

[19] The Hon John Fahey, House of Representatives Hansard, 28 May 1997, p. 4265.

[20] ibid.

[21] Human Rights and Equal Opportunities Commission, Committee Hansard, p. F&PA 570.

[22] ibid., p. F&PA 571.