A Matter Of Process

Business process outsourcing is starting to make inroads at all three levels of Australian government.

It is often said that a good organisation knows what to do and a great organisation knows what not to do. Just like car manufacturers do not make the entire vehicle and food companies do not grow their own crops, our governments do not conduct all their business by themselves any more.

Whether it is information technology, recruitment, security, legal advice, procurement, travel services, customer contact, insurance, bill processing or payroll, outsourcing of non-core areas or specialised tasks is making better business sense to government executives in Canberra, in our state capitals and at our local council chambers.

By outsourcing certain functions, governments can gain immediate and inexpensive access to the best technology or expertise available. Those who believe that the era of the outsourced government has arrived say outsourcing enables organisations to focus on their core business to increase their revenues, improve productivity, control costs, integrate technologies, manage risk and enhance overall performance.

The outsourcing of business processes can be categorised within a hierarchy that measures their strategic value to the organisation. At the base of this value chain is information technology outsourcing (ITO). At the apex is business transformation outsourcing (BTO). In between sits business process outsourcing (BPO). The divisions blur within some organisations depending on the importance of IT to various business functions and the importance of those functions to the conduct of the organisation.

A recent report from Accenture revealed that almost 90 per cent of government executives around the world outsource activities that are "important or absolutely critical" to their service delivery to citizens. The study, Outsourcing in Government: Pathways to Value, is the company's second annual report focused on government outsourcing practices. Comprised of surveys and interviews with more than 150 executives in 23 governments in Asia, Europe, North America and South America, it found that governments outsource mainly to improve the speed or quality of the service they provide.

Among the activities and services these governments outsource most often are staff training and education programs, finance and accounting, human resources and supply chain operations, and information technology applications and infrastructure.

But outcomes vary. Government executives who said they outsourced to gain access to technology, to change operations or to gain access to workers with specific skills, were more satisfied with the results than were executives who said they outsourced to reduce costs. For example, 71 per cent of executives who said they outsourced to access new technology, 71 per cent who said they outsourced to centralise operations, and 70 per cent who said they outsourced to gain access to expertise indicated that these objectives were "mostly or fully met". By contrast, only 50 per cent of executives who said they outsourced primarily to reduce costs and only 24 per cent who said they outsourced to increase revenues said their objectives were "mostly or fully met".

The Accenture study also found that governments that used outsourcing to change the way they operate were more inclined to engage in BPO than were governments that used outsourcing to reduce costs. More than two-thirds of the executives who said they used outsourcing to transform their agencies said they achieved change through BPO.

Accenture says governments outsource to achieve one of two objectives: to change operations to improve citizen satisfaction and address severe budget deficits; or to create efficiencies through cost reductions and greater productivity. The study revealed that governments in the UK, Canada and the US are the most advanced in using outsourcing to modify the way government operates, while those in Singapore, Hong Kong and Japan are the most experienced in using outsourcing to achieve process efficiencies and reduce operating costs.

Gartner says that although BPO has gained visibility in the IT services industry only in the past five years, the service itself has existed for decades. Gartner says service providers offer BPO for hundreds of business processes. Some of these service offerings are stable; some are just emerging.

In Australia, BPO is gaining traction with all three levels of government.

The Australian Taxation Office (ATO) recently announced it had extended its award-winning outsourcing contract with EDS for an additional two years to June 2006 at a cost of $300 million. The original deal - the largest by any federal government agency at $500 million - was recognised in 2002 as the world's "Most Flexible Outsourcing Contract" in Outsourcing Journal's annual awards.

The ATO serves nine million taxpayers and has a staff of 19,000 across 98 locations. The outsourcing deal covers Y2K contingencies, major upgrades to infrastructure, a virus management system, delivery of new IT to support the implementation of the GST, and sustained improvement in the reliability of complex IT systems. It also embraces the continued provision, maintenance, management and operation of the ATO's IT including mainframe services, data warehousing, 24,000 desktop PCs, 1000 mid-range servers, 2000 printers and more than 4000 laptop computers. On a monthly basis, EDS handles more than 20,000 help desk calls in support of ATO staff and systems.

BPO has proved its worth at state level too. In the early 1990s, the government of South Australia was convinced that adding significant efficiency improvements to its IT systems was crucial to its commitment to deliver more for less. At the same time, developing a robust local IT industry, with inward investment and an export focus, had also become a priority. But the state's agencies were not in a position to achieve the necessary IT improvements across the entire government enterprise on their own.

In 1994 South Australia announced it was seeking a partner to overhaul the state's entire IT infrastructure to help the state become a key IT player in the Asia-Pacific. This partner would own, manage, improve and continually refresh the infrastructure and operating systems used by almost 80 separate agencies at about 1000 sites across the state. It would also be required to invest significant resources to help develop the state's burgeoning IT industry. Late in 1995 the SA government awarded the world's first whole-of-government IT outsourcing contract to EDS.

The SA government estimates its savings will total $100 million over the life of the contract. But that is not its prime motivation for outsourcing. With a more efficient IT infrastructure the state is now able to provide better, more reliable services to the public, in many cases at lower cost. As early as July 1999, the South Australian Centre for Economic Studies said the outsourcing operations in the state had already contributed more than $225 million to the economy.

More recently, the Special Minister For State, Senator Eric Abetz, in April announced the first wholly Australian-owned independent medium sized company to be awarded a federal government outsourcing contract, valued at $9.4 million over three years. Volante Systems will provide IT equipment, maintenance and onsite support to electorate offices in 243 locations across Australia. The contract came into effect on July 1, 2003.

"These new arrangements will improve reliability in service delivery to meet the current and future business needs of electorate offices," Senator Abetz said at the time.

"Improved alignment between electorate office and Parliament House strategies and technical environments will allow federal parliamentarians to serve their constituents more efficiently, whether from the electorate office, Parliament House or a remote location."

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No Bed of Roses

TPI is a global outsourcing advisory firm that manages almost every large outsourcing deal in Australia. It is the only firm in the Australian market that provides outsourcing strategy and also manages the transaction and the post-deal relationship. TPI has completed more than 500 outsourcing deals around the world worth more than $US300 billion. Its Australian customers include Telstra, the federal government and the government of South Australia.

Arno Franz, the managing director of TPI Australia, previously worked in the senior executive services of the New South Wales and West Australian governments. He also sold to governments in previous roles with EDS and CSC. Franz describes BPO as "like a merger and acquisition activity" because in some cases, governments take a large chunk of their organisation and hand it over under a commercial relationship to another commercial entity.

"It's a bit like selling part of the farm," Franz says.

"One of the things that has impressed me most is that organisations are willing to consider BPO and actually be a little bit adventurous. For example, some of the large banks, like ANZ, have attempted three times to outsource their HR administration. They haven't been able to get it done, primarily because the market capability here has not caught up with its needs. So you're seeing organisations like the ANZ - which has one of the best costs to income ratios of any bank in the world - still striving to extract more from its organisation.

"It's gratifying to see that organisations are prepared to step outside the norm and actually go for it. However, one of the bigger disappointments - and this applies in the BPO space as much as it does in the ITO space - is the lack of appreciation of what it takes to actually manage one of these deals once you get it signed. There has been plenty of negativity about outsourcing and that's because organisations don't fully appreciate that once you've outsourced a process to a service provider you still have management responsibility for the function," Franz continues.

"It still requires the same level of attention and focus in order to ensure that the service provider delivers what they said they would deliver, and creates value for you during the length of the relationship. People don't put enough time and effort into managing the relationship. It's no longer just a simple contract administration function. It's much, much more than that."

Analyst firms such as IDC and Forrester, and outsourcing advisers such as Accenture and TPI, say the single most important step governments can take before entering into a BPO arrangement is to "bulk up" their processes and build critical mass.

"Too many governments still maintain an agency-by-agency approach to BPO," says Franz.

"That is fraught with danger because departments change as government policy changes. You're seeing it now in NSW. But there are some basic processes that never change and governments should be trying to bulk up those processes, whatever they are. They should not have public servants maintaining them. They should put them out to the private sector - not on an agency basis but on a whole-of-government basis. Only with this approach will they drive real reform in the public sector.

"That's what the South Australian government did. Here was a state with an economy that was biased towards manufacturing and primary produce. Tariffs were coming down, so manufacturing was being squeezed. The government decided to offer a large chunk of its infrastructure - in this case IT - to get a large player to set up shop locally, create jobs and service other entities across Australia or even beyond. They created infrastructure, they created jobs and they produced real gains. With BPO, it's only when you take something large enough that you can really do something with it."