Failed Strategy?

The Commonwealth’s whole-of-government IT outsourcing strategy ended up a ‘whole lotta trouble’.

On December 22, 1997, the then federal minister for Finance, John Fahey, issued a media release detailing the timetable for his government’s strategy for whole-of-government IT outsourcing. Fahey stated: “The timetable has been developed in line with the government’s key objectives of cost savings, industry development and improved effectiveness in the use of IT infrastructure across the Commonwealth.”

Within three years the Australian National Audit Office (ANAO) and Australian Stock Exchange MD Richard Humphry had concluded some of those fundamental assumptions and decisions were at best arguable and at worst invalid. Shortly afterwards, all outstanding tenders were halted. None have been let since.

Two years after the Humphry report it is useful to ask the question: Did whole-of-government IT outsourcing work?

Was the initiative a success as a political strategy? Considering it never completed, it is probably fair to conclude it fell short of its objectives. As the ANAO pointed out, since it was impossible to identify how much IT was costing before, calculating savings was also impossible.

Politically, the Office of Asset Sales and IT outsourcing (OASITO) and its legal advisers contributed nothing. The hiring of Shaw Pittman was handled badly and Fahey had the difficult task of justifying his actions. His claim that: “This has never been done before anywhere in the world”, sat badly with his decision to hire overseas experts. A question never seriously answered was, if it had never been done before, how could there be experts?

It is also interesting that, two years after the initiative was halted, one of the highly paid Shaw Pittman lawyers, currently in Washington, DC, is enrolled in a masters degree course at the Australian Defence Force Academy (ADFA) where he is studying IT strategies.

OASITO did not cover itself in glory by accidentally sending a disc to one of the bidders for the Health Group contract. The Case of the Misplaced Disc has allowed Opposition senator Kate Lundy to make political capital that this government could have done without. Senator Lundy will continue to be a thorn in the side of the government for the foreseeable future.

Did the Australian IT industry benefit? Lundy does not believe so. At least one company that was supposed to benefit from out-of-scope Industry Development, Approved Systems, has been put into receivership. Ironically, Approved Systems used to supply computers to the Health Insurance Commission before outsourcing. When OASITO and its advisers decided reselling contained too little intellectual activity, Approved Systems was locked out of an area it had been servicing quite happily. Obviously, the out-of-scope Industry Development activities were not enough to let the company survive.

Most of the big outsourcers did not support the strategy of linking outsourcing contracts to Industry Development initiatives. The Department of Communications, Information Technology and the Arts (DCITA) is now left fronting up to Senate Estimate committee meetings trying to justify ID initiatives that it never supported in the first place.

What is the current status of the contracts that were let?

The first of the federal government’s attempts to outsource was the Department of Veterans’ Affairs’ (DVA’s) mainframe operations, outsourced to Ferntree in 1991. After five years the mainframe operations, networking and desktop support were re-tendered and went to IBM Global Services Australia in 1997. The Department of Finance (DoF, as it was then) always saw the DVA project as a trial of outsourcing. That trial was widely viewed as a success, especially as a contract that had been let to one vendor was successfully handed over to another.

Unfortunately, as with many things associated with IT, what works in one situation does not always translate to another. The DVA had some special characteristics, there were some specific and unique issues associated with the mainframe operations and anyway, the DVA was a small agency working in a relatively stable business environment delivering fairly simple services to a slowly evolving sector of the community. These factors do not map easily to other government agencies. The lessons learned from this trial were, at best, misleading and at worst, wrong.

The Department of Finance and Administration (DoFA) outsourced its own IT operations in 1997. It is rumoured that the budget group users (those who put together the federal budget and monitor government expenditure during the year — probably the most critical users in Finance) have not spoken with their outsourcer in the intervening five years.

Meanwhile in November last year the Australian Financial Review claimed Cabinet had been forced to recognise that its so-called reforms introduced in 1999-2000 — accrual accounting and the devolution of financial management and reporting to departments — have been a failure. In the November mid-year budget and economic review was a series of new expenditure allocations — $18 million for “enhanced budget information systems” and $23.2 million for capital spending on equipment to support these programs.

The DVA and the DoFA both outsourced their IT before the whole-of-government initiative. All the subsequent outsourcings were handled by either the Office of Government IT or OASITO. Apart from the troubles in the tendering process, not everything has been plain sailing with these contracts either.

Recently, the Health Insurance Commission and its IT outsourcer decided that the relationships between the contract and account managers on both sides were not working. The problems resulted in a wholesale replacement of personnel. It would seem there was such a mismatch in expectations and obligations that a fresh start was needed. Senior management on both sides recognised the problem and addressed it in a cooperative way. Sometimes partnerships go beyond formal agreements.

Of course one of the major difficulties facing an agency wanting to retrieve its IT is obtaining staff capable of architecting, designing, implementing, procuring and managing the technology. Agencies that outsourced lost much of this expertise and are having trouble managing their contracts. Taking full responsibility for their IT is just too difficult in a short period. A number of agencies seem to be taking various strategies to re-establish better control over their IT infrastructure.

For instance, in the Australian Customs Service staff are handling new IT initiatives. New applications and the infrastructure on which they run are being specified, developed, implemented and owned by Customs, rather than by the incumbent outsourcer. It seems to be a strategy of recasting the contract by evolution and stealth so that, eventually, Customs can take the remainder back in-house with a minimum of disruption. The outsourcer seems happy with this arrangement. Running an existing, stable system is a lot less risky and costly than implementing change.

The Department of Transport and Regional Services (DOTRS) confirmed in November that it would not renew its contract when it expires in June 2004. DOTRS started to examine its outsourcing options in December 2001 — only two years into a five-year contract — and decided to move to a more selective sourcing policy. DOTRS’ experience of the Fahey IT outsourcing initiative has not left it wanting more.

Have we seen the end of large-scale federal government IT outsourcing? Some agencies will find it so difficult and expensive to extract themselves from their relationships that they will probably need to renew their contracts when they expire. Some may renegotiate their contracts so that they retrieve a degree of control and move to a more appropriate outsourcing model that better meets their requirements.

One issue that has yet to become a major problem is that of departmental reshuffles. If the government of the day decides to reorganise in a way that requires significant modification to existing outsourcing contracts, it will find out the hard way just how flexible public sector IT outsourcing can — or cannot — be.

The federal government is still outsourcing IT projects; however, it has returned to the model in use before the whole-of-government initiative commenced. Agencies continue to engage the private sector to develop systems, maintain applications, support desktop machines and so on. A variety of outsourcing models are being applied, as they always were before a particular group of ministers, advisers and economists decided to impose their views in an area that is already complex, full of risk and where projects often fail.

Federal government IT departments often have to work to demanding time frames and in difficult circumstances. They usually do an excellent, if unheralded, job. They did not need the distractions of the past five years and still have not repaired the damage done to the public sector IT community.

The author works in Canberra and is familiar with both the bidding process and the implementation of major federal government IT outsourcing projects. The author prefers to remain anonymous