Making a Federal case of IT

The federal government's IT outsourcing initiative sits under increasingly darkening skies. The tempest may be gathering, but there is one small patch of blue in the storm clouds according to one close observer Canberra in January is usually a rather sleepy place. Politicians are away and there are more public servants seen on the beaches around Batemans Bay than in the nation's capital.

However, early in January this year, the lights were burning late in the offices of the bureaucrats tasked with implementing the federal government's IT outsourcing initiative. Richard Humphry, CEO of the Australian Stock Exchange, had prepared a report on the outsourcing initiative which had been released to the Department of Finance and Administration (DOFA) and the Office of Asset Sales and IT Outsourcing (OASITO). The government response to the Humphry Review was being framed that night - and it spelled the end of OASITO's controversial role in forcing the pace of federal government IT outsourcing.

The signs of trouble for the outsourcing initiative had been there for some time. Kate Lundy, Labor's ACT Senator and spokesperson on information technology issues, had landed some punches during her relentless questioning of bureaucrats in the Senate Estimates process. More significantly, the September 2000 report by the Australian National Audit Office - despite using polite, bureaucratic language - was scathing of significant elements of implementing the IT outsourcing initiative.

When the Howard government in April 1997 launched the federal government's IT outsourcing initiative, its spruiker was Dr Andy Macdonald, the then chief government information officer. Macdonald was especially fond of the phrase "the devil is in the detail". He is now long gone but his prophetic words remain. It was a simple policy to put in place but devilishly difficult to make work.

In the four years since the Howard government launched the outsourcing initiative, business worth more than a billion dollars has been written with outsourcing companies. The leading beneficiaries are EDS, CSC and IBM GSA. Hundreds of IT jobs have been transferred from government agencies to the private sector. IT companies have changed the way they chase federal government business and some have closed their Canberra offices.

One of the keenest observers of the full saga of IT outsourcing in Canberra has been industry veteran Jack Radik. He has seen IT outsourcing from a variety of perspectives: as a lobbyist when the IT outsourcing policy was being formulated, as an executive in outsourcing companies and, most recently, as an outsourcing consultant to government agencies.

"I was consulting on government issues to the Australian Information Industry Association (AIIA) when John Howard came to power in March 1996," Radik says. "The coalition's public sector policy platform had included a saving of $985 million over three years by outsourcing government IT. Even in 1996 it was evident from overseas experience that IT outsourcing for savings was generally unsuccessful. On behalf of AIIA's IT industry member companies, I lobbied ministers, their advisers, as well as OASITO's predecessor, the Office of Government Information Technology (OGIT), in a futile attempt to deliver a message of Â'outsource for better outcomes rather than to save money'. The savings were a Â'core commitment', not open to debate."

Radik's next encounter with outsourcing was at CSC Australia where, as Canberra manager, he was closely involved with CSC's bid for Cluster 3, the first contract awarded under the IT outsourcing initiative. "Those were exciting times," he says. "It also graphically illustrated to me the impact of government policy on multinationals. Without the federal government's requirement for local industry involvement, CSC would not have brought IPEX into the Cluster 3 equation as a supplier of desktop equipment."

After CSC, Radik set up ValueSourcing, a small consultancy firm which focuses on IT strategies in general and sourcing strategies in particular. Over the past three years, he has helped a number of government agencies through the process of outsourcing their IT infrastructure: several smaller agencies and the Department of Health and Aged Care, which has some 4000 "seats". Because he helps evaluate bids, Radik cannot accept assignments from vendors, only from their clients: there is too much potential for a conflict of interest. He says: "I feel like I am swimming against the tide. IT outsourcing has taken many long-term public servants and put them into senior positions with the outsourcers - where many are doing very well, thank you. However, there is a delicious irony in listening to the sales pitches of the same people you were selling to a few years ago."

Nevertheless, Radik firmly believes that his years of private-sector management experience brings value to his clients. "I bring an outsourcer's perspective, but can be trusted because I'm working for the outsourcer's client. I think it helps achieve good business when each party can understand the pressures on the other. The pressures in government departments are radically different from those facing companies like outsourcers."

How does this close observer assess Canberra's IT outsourcing "experiment"?

Bad Groupings

"There is no doubt that the grouping or clustering of agencies was a mistake," he says. "OASITO's theory was to build . . . business from three or four agencies and derive economies of scale. However, each agency had different management structures and goals, and different technologies. This resulted in the inevitable committees seeking compromises between the divergent agency requirements. This took time and money. I think things will be simpler in the new regime when government departments individually will deal directly with outsourcers."

Nonetheless, Radik suggests that outsourcing probably wouldn't have progressed in Canberra without OASITO. "Look, I think that something like OASITO was needed to break through the roadblock of opposition to IT outsourcing that Canberra's powerful IT bureaucrats put in place. OASITO was given unprecedented power, backed by a strong minister as well as the Prime Minister, which they exercised with a certain relish. One of the things which intrigued me when I went across Â'to the other side' - that is, working on behalf of government departments - was that the agencies disliked OASITO. When working for outsourcers, where the name OASITO was bandied around like a swear word, I had thought that the agencies would love OASITO for their tough negotiation on behalf of the agencies."

Page Break

No doubt OASITO would argue that to be disliked by both sides means they got the balance just right, Radik believes.

Essentially the role of OASITO was to bludgeon both outsourcers and agencies roughly in equal proportions to get outsourcers to reduce their prices, and to convince government agencies to accept lower levels of service than the "over-servicing" they might have enjoyed in the past. "The result of this approach is a low-cost, low-service contract," Radik says. "I used to describe these deals as lose - lose - win: the losers were the agencies and outsourcers; the only winner was Minister Fahey, with his press release announcing further outsourcing savings."

The relationships between outsourcers and government departments were adversarial from the start. There wasn't even a honeymoon period. Mixing his metaphors, Radik likens OASITO's role to the ugly stepmother holding the shotgun to the head of an unwilling bride and groom and then letting them sort out their relationship once the marriage contract is signed.

"Having OASITO as a go-between - filtering and manipulating the information - prevented the development of a normal one-to-one business relationship." Radik says. "OASITO was single-minded in its focus on getting the contract signed and had little interest and no accountability for how things went afterwards."

How One Agency Made IT Work

There is little doubt that most of the group or cluster IT outsourcing contracts have had their fair share of problems. There are press reports of embarrassing system failures and of the imposition of the consequent contractual penalties (termed "service credits"). Rumours abound of outsourcers losing money with particular clients. Have there been any success stories?

"I would single out the Department of Health and Aged Care as being a clear case where outsourcing has gone relatively well," Radik says.

In December 1999, the Health Group (Department of Health and Aged Care, Health Insurance Commission, Medibank Private Limited) signed contracts with IBM Global Services for outsourced IT infrastructure services. Health handed its infrastructure over to IBM GSA in June 2000, at the same time as around a hundred Health IT staff accepted redundancy packages. More than four-fifths chose to accept work with IBM GSA or its subcontractors ASI, Hallis and Advantra.

Health has had a reasonably untroubled move to outsourced IT infrastructure. In Radik's opinion, one of the measures of a successful outsourcing project is when the users perceive nothing as being different after outsourcing has occurred. "Typically, in the early weeks or months of outsourcing you expect diminished service as the new people and processes bed down," he says. "However, in Health's case, things went pretty smoothly, due in part to the high take-up rate of ex-Health IT staff by IBM GSA. Both parties worked pretty hard to encourage this outcome."

What did Health do differently? Radik has some strong views about the success factors.

"One of the first things I learned about Health was that its chief executive was supportive of the move to outsource IT infrastructure. This was not the case in all government departments. Because of the widespread opposition to outsourcing, some chief executives were happy to delay or frustrate the process in the hope they might escape outsourcing. This is where OASITO with its ministerial backing came in to flex its muscles," says Radik. "Health realised early that IT outsourcing was much less about information technology than the management of changes to internal processes and culture. They brought in a project manager with experience in Defence, non-IT, projects, and he built up a strong team under him."

One of the factors that aided Health was that the department could draw upon the experiences of the federal government agencies that had been outsourced earlier. Other departments had underestimated the resources required to manage the transition. This is where recognising that IT outsourcing at its heart is about change management is critical: Health worked with IBM GSA to redesign internal processes - mundane matters such as a request to relocate a group of PCs have to be formalised when an outside company is undertaking the work. It no longer can be as simple as an informal request between work colleagues.

Considerable investment by both IBM GSA and Health went into these new processes - and this has paid off since IBM GSA arrived. "It seems to me that other agencies rushed their transition and handed over the infrastructure to meet a contractual date rather than when there was manageably low risk," Radik says. He warns: "If the transition work is not finished at the time of handover you'll never catch it up. Your outsourcing staff are running on the treadmill at full pace just to stay stationary once handover has taken place."

Radik believes IBM GSA views Health as a demanding customer. "Health has been insistent on IBM GSA's work being of a high standard. This is tough for an outsourcer if you're working with a contract with extremely competitive pricing; you inevitably are looking for shortcuts. However, IBM GSA has, with some coaxing and cajoling, delivered the goods and I am told that their staff see the Health site as a good one to work at. I suspect without Health's strong contract management team the shortcuts would have been taken and the results would accordingly have suffered."

Was it Worth it?

No organisation would go through the unavoidable strains and stresses of outsourcing and simply hope that the best outcome is that "things will be no worse". So, nine months after outsourcing its IT infrastructure, has Health seen any benefits? In Radik's view it has.

"The question of whether there have been savings is a political one and I think you could prove there have or have not been savings depending on how you chose your definitions," he says. "In my view, it is difficult for an outsourcer to come into an organisation, make a modest profit and deliver savings unless the target organisation was grossly inefficient to start with, or the outsourcer could offer significant economies of scale, or a smarter way of delivering IT.

"Yet you want to change as little of the technology as possible at handover because that is one source of risk you can do without at that time. Conversely, if you wanted to guarantee failure, you would change people, management structures, processes and the technology! Now that IBM GSA understand Health's IT and business better, it is starting to come up with new approaches which have the potential to deliver Health genuine savings."

Page Break

Another benefit that Health recognises is better cost control. A charge-back system was introduced coincident with outsourcing so that users pay for their use of IT services. Outsourcing has provided the mechanism to measure the use and for Health to bill internal clients. "This has already improved the consumption habits of Health users," Radik claims.

One area that Radik cites as a disappointment in Health's relationship with IBM GSA to date is that the latter delivers little "strategic value-add". "It seems to me that [if IBM did, it] would benefit both parties," Radik says.

"I can recall the internal planning sessions in the large outsourcing organisations where we would acknowledge that IT infrastructure outsourcing for government was a Â'cut-price supermarket business'; that you would take on this business in the hope of developing a relationship with the client that would lead to opportunities for higher-value business." In spite of that noble objective, a common observation from many Canberra agencies is that their outsourcers only want to discuss their current business with the agencies and are reluctant "to move up the food chain". "Maybe this will come with time," Radik suggests, "but I had expected the pushing would have come from the outsourcer rather than vice-versa."

All Quiet on the Outsourcing Front

Even if some of the agencies are now getting benefits from outsourcing, what of the broader future of IT outsourcing in Canberra? According to Radik, in terms of new deals the next few months in Canberra are likely to be pretty quiet. Sources within outsourcer organisations tell him several companies have "iced" their Canberra outsourcing sales teams.

It will take bureaucrats a while to sort out the implications of the Humphry report and its requirement that implementing the government's IT outsourcing policy is to be included in the performance agreements of agency heads. In the meantime, the IT outsourcing activities of OASITO are being wound down although the Department of Finance and Administration will offer IT outsourcing consultancy services on a fee-for-service basis. However, more uncertainly will come with the federal election, likely to be called in November or December this year. This could bring a new Labor government - and new uncertainties about IT outsourcing policies.

"It is my understanding that the Labor Party is not opposed per se to outsourcing," Radik says. "After all, it was under the then Finance Minister Beazley that the push towards IT outsourcing really commenced. I think that outsourcing would continue at a more measured pace and without what the Labor Party would call the ideological zealotry of the past few years."

Some observers are predicting that the pendulum will swing further, that in-sourcing will become the fashion. (In other words, that outsourcers will be replaced by teams of public service IT professionals - a return to the original situation.) Does Radik see this happening? "I think this is very unlikely; it is difficult to put this genie back in the bottle," he says.

"I think that there is a maturing of the outsourcers; they are developing the methodologies that three years ago I preached, and believed, they had! However, I think that the very large outsourcing deals may well be seen as dinosaurs - although the extinction of dinosaurs takes a long time, just look at mainframes. It will be interesting to see the impact of application service providers (ASPs) on this marketplace and also just what style of IT infrastructure is needed to support online government."

There is one thing that is certain: there are plenty of headlines left in Canberra's IT outsourcing initiative. The Senate inquiry into IT outsourcing is gathering pace. In an election year, the Labor Party inquisitors led by Kate Lundy will be digging deeply into the IT outsourcing deals, attempting to land more punches on the Howard government.