Legal Practice Briefing

Number 27

28 August 1996


Outsourcing significant information technology services is now considered a practical alternative to maintaining an extensive in-house function. In the Commonwealth context, IT outsourcing (mainframe, mid-range and desktop platforms) is currently the subject of a scoping study organised by the Office of Government Information Technology.

A decision on whether or not to outsource information technology support is primarily a business decision. The main reasons for outsourcing are to:

  • decrease the cost
  • concentrate on core business
  • achieve better service outcomes
  • improve certain aspects of accountability of the function by contract.

The key to success in outsourcing is good, early planning. A proper understanding of the impacts of outsourcing on key interest groups (generally management and staff), controlling these impacts and minimising their negative effects, is a fundamental part of the planning process.

In this briefing, 'outsourcing' describes the contracting out of management and operational responsibility for a significant IT service, usually including assets transfer (equipment, software, site) and transfer of personnel. In a broader context, outsourcing may mean any contracting out. It may also be used as a modern term for facilities management and bureau processing arrangements, the major difference being that outsourcing as the term is used in this briefing also includes at least the option of an asset transfer.

Controlling the Impacts and Managing the Risks

The impact of outsourcing on those currently responsible for management of the function is fundamental. If the service is outsourced, the management of the provision of the service from within the organisation is radically changed from management of a function to management of the business relationship with a contractor. The lack of control posed by movement of this function outside of the organisation is often seen as the greatest risk of outsourcing. Therefore, it needs to be carefully planned and managed.

In reality, the effect of outsourcing can simply be seen as a shift in focus from managing a function to managing a contractual relationship. If properly implemented, it need not represent a loss of control. Careful project planning together with a contract written to provide for control measures such as performance monitoring, and good contract administration will minimise or negate any lack of control.

Risk management generally is always an important feature of contracting out in the Commonwealth. As with any contract, it is important to understand the risks associated with outsourcing and to minimise those risks for both the customer and the service provider by careful management of the process and the inclusion of appropriate provisions in the contract. A range of risks is recognised as being associated with outsourcing, including for example, failure to achieve transition to the new service provider as planned, inability to meet the required service levels, loss of equipment and associated software preventing the organisation from resuming the service.

There are ways of minimising all these risks. The solution is to identify them all early as part of the process, to assess their possible impact and to build into the contractual and business relationship all appropriate risk minimisation measures.


The Key to Success - a Planned Approach

Outsourcing is a project-based exercise. It requires good project management skills and the ability to manage and coordinate a range of related but different activities at once. A suggested approach is as follows:

Internal Analysis

The first step is to take a close look at the internal IT function being considered for outsourcing. The service must be costed, defined and measured. Aside from broad descriptions like 'desktop computing', or 'help desk' or 'mainframe support', what services are actually being provided and what are the levels of performance required now and in the future for those services? .

Current Costs

In order to successfully market test a service, an organisation must know what it currently has, how much it costs and how it is performing. The measurement of the current service, including its cost and its standard of performance, will provide a benchmark or baseline against which alternatives can be tested..

Adequacy of Service

Are the levels of performance too low or higher than is necessary for the organisation's business objectives? In seeking to market test an internal service, or to obtain external offers for the provision of a significant IT service, it is important that the description of the service actually matches the organisation's requirements, whether or not those requirements are currently being met.

It is appropriate as part of this process to look at broader strategic planning issues, including the organisation's long term objectives for its IT requirements. It is important to determine whether an organisation's IT function is a core function and as a matter of administrative policy whether it wants to maintain an internal specialist IT function.

Some of these issues may need to be built into the outsourcing contract for example, planned changes in platforms, decommissioning of applications, network changes etc.

Before deciding whether or not to test the market it may be appropriate to engage in some rationalisation or restructuring of the internal IT service in order to provide a more realistic benchmark against which to test the market. Rationalisation can also better position an internal service provider to compete against external offers, if the organisation decides to include an internal option in the market testing. Even if a decision is made not to proceed with outsourcing, the organisation is likely to have gained substantial benefits through its analysis of its IT function.

The organisation may need to engage an external consultant under a consultancy contract in order to achieve some of the above steps. Such a consultant may also be engaged to advise the organisation on broader IT strategic planning issues. The organisation needs to consider whether its IT function provides it with a competitive or strategic advantage. It is important to be wary of confidentiality and conflict of interest considerations here to ensure consultants are not also involved in bidding for the work.

At this point, the organisation should be in a position to decide what service it actually needs, whether to market test the provision of the service and whether to include an internal option in the testing process.

If a decision is made to test the market, the organisation needs to decide how to test the market and should commence preparation of the appropriate documentation to seek offers.

Some organisations choose a two stage process a broader initial stage seeking to identify a reasonable shortlist based on corporate capability or experience considerations others choose to issue a detailed Request for Tender at the outset. Whatever process is chosen it is essential that offers are sought for a service that is clearly defined, which will actually meet the organisation's needs, and to standards of performance that are objectively measurable and realistic.

Communication with Staff

Current staff are essential to the process. They are responsible for the existing service and therefore the best people to assist in the description of what is required and the development of baseline measurement etc. It is therefore important that staff communication commences at the outset and that staff are kept informed of the organisation's objectives for its IT requirements. Careful human resources management is crucial to the success of outsourcing. Staff must be advised of their options, offered appropriate counselling, and regard must be had to relevant provisions of agency agreements.

Assett Issues

Outsourcing now commonly includes asset transfers. Examples are transfers of staff, sale of existing equipment, and/or a transfer of existing contracts used in the provision of the service (software licences and equipment and software maintenance contracts). Sometimes the sale, lease or sublicence of a site is also involved. It is therefore important that a complete asset stocktake and valuation is undertaken as part of the process of defining an organisation's current service and preferred requirements. An examination of relevant documentation should also be undertaken. The organisation must know what equipment and other physical property it has, including consumables, what contracts are currently used in the provision of the service and relevant details of those contracts.

For staff who are permanent employees, the question of transition to an outsourced arrangement will have to have regard to Commonwealth Government industrial relations policy. It is common for specialist outsourcing companies to seek a transfer of existing staff to do the work. An organisation can facilitate this process by allowing communication between staff and bidders about options for staff. In addition, or alternatively, an organisation could redeploy existing staff or offer them redundancies. If movement to the outsourcer is an option, the RFT could seek information from bidders about their intention or otherwise to use existing staff and the RFT could make bidders' offers on seeking to employ existing staff relevant to the evaluation. Many staff view the opportunity to work with an organisation that specialises in their field as valuable; others will prefer redeployment or simply a redundancy it is outside the scope of this Briefing to deal with these issues, but industrial issues generally can have an important bearing on the achievement of an organisation's objectives.

The organisation may choose to simply sell the equipment or redeploy it and exclude it from the outsourcing process. Alternatively, bidders may be offered the equipment for resale or use in the provision of the service.

The contracts issue seems complicated, but careful management avoids problems. The steps that must be taken are:

  • prepare a complete list of all contracts currently used in the provision of the service. These are likely to include hardware maintenance contracts and software licence and maintenance contracts;
  • establish when each contract runs out and what, if anything, has been prepaid;
  • establish the nature of licences so that transfer/assignment possibilities can be examined. It is very important to know whether licences are restricted to certain equipment, users or sites;
  • decide whether the RFT should require bidders to obtain their own contracts or offer them a transfer, or the use (with appropriate consents), of existing contracts. Alternatively, bidders may be permitted to offer their own solutions on the contracts issue;
  • keep the contracts list up to date as the outsourcing process continues and include a current list in the RFT (general list only as confidentiality obligations would exclude disclosure of at least some aspects of existing contracts, for example, price);
  • contact existing third party contractors, if appropriate, to find out whether any consents to transfer/sublicense are likely and what, if any, associated charges would apply;
  • include any transition costs associated with transferring existing contracts in the evaluation of bids.

Preparation of Offer Documentation

A significant part of the work necessary to prepare a Request for Tender or equivalent document (the 'RFT') will have already been done when the existing service was measured and considered against the organisation's actual requirements. It is now time to turn this work into a Statement of Requirement. This can be done in a number of ways increasingly common is the use of Service Level Agreements to describe IT service requirements, for example for mainframe support. The SLAs will describe the services, the times the services are to be available, workload requirements, output requirements and appropriate performance measures based on user requirements.

As stated above, the Statement of Requirement must comprehensively and accurately set out the organisation's service and level of performance requirements. The Statement of Requirement must also contain the organisation's preferred asset transfer arrangements. Organisations often look for flexible solutions to their IT service requirements and the RFT may not prescribe matters such as asset transfer issues or site preferences, leaving it to bidders to offer what is in their view the most cost-effective solution to meet the organisation's needs. The RFT may also offer bidders other options for dealing with matters such as network requirements and disaster recovery. It should also contain appropriate conditions of offer, contract terms and conditions, evaluation criteria, required pricing structure and corporate capability requirements.

Contract Terms and Conditions

It is very important that the RFT includes the organisation's proposed outsourcing contract terms and conditions because some matters dealt with in the contract, and on which bidders' views should be sought, will not be covered in the SOR or elsewhere in the RFT. The contract should include provisions for:

  • the types of services required
  • the standards of performance
  • implementation of the outsourcing solution
  • term of the contract and any renewal options
  • sale of equipment and/or transfer of staff/contracts, if appropriate
  • a licence to use the organisation's intellectual property (including software and data)
  • acceptance testing of the solution at end of implementation
  • ongoing management arrangements, including change and configuration management, disaster recovery etc (making sure the customer has appropriate powers of veto on some decisions)
  • contract administration arrangements
  • flexibility for changes in service requirements
  • the year 2000
  • performance monitoring including required reports
  • charges and payment arrangements (for example, fixed charges for actual usage with payment in arrears)
  • a realistic reduction in charges for non-performance
  • reviews and audits
  • including technology improvements during the life of the contract
  • benchmarking to compare solution with industry best practice during the life of the contract
  • intellectual property ownership (for example, protection of the organisation's ownership of IP, t"nership of new IP developed for the purpose of providing the services)
  • privacy, archives and other legislative responsibilities
  • confidentiality and security protection (for example, the issue of shared use of resources)
  • specific key personnel to do the work
  • detailed termination and transition-out arrangements
  • preferred contractual protection mechanisms (for example, insurance, bank and performance guarantees).

Note that if an agency decides to use a contractor to operate an existing system or to provide a service in relation to an existing system (for example, help desk), PE68 should be used.

Evaluation of Offers

It is important to think carefully about what criteria will be used to evaluate bids and what weightings will be applied to those criteria. The three broad categories generally used are management, technical and financial. For each of these, the setting of appropriate criteria and their drafting are crucial. It is also important to consider whether price should be the overriding criterion. All transition costs relevant to individual solutions should be included in the evaluation. Site visits to relevant reference sites should also be undertaken.

Contract Administration

Experience has shown how important contract administration is to the success of outsourcing. Contract administration will involve a variety of functions all of which have timing and substantive requirements for example, implementation plan fulfilment, acceptance testing, checking invoices against usage, reviewing performance reports, planning reviews and audits, change and configuration management, business continuity, benchmarking or efficiency planning, internal reporting and strategic planning. The functions of the contract administrator should be clearly explained in the contract but the contract includes a myriad of other matters. The best way to ensure all aspects of contract administration will be properly performed is to prepare an administration plan that isolates relevant tasks and describes when each task has to be performed.

Internal Bids

The question whether to allow an internal bid to compete against external solutions is often raised as part of an outsourcing exercise. The decision depends on a number of factors including the organisation's view of its core business requirements, the likely viability of an internal bid on the basis of information gained so far about the existing baseline and current performance, possible transition costs, and competitive neutrality principles.

If a decision is made to include an internal bid, the RFT will have to be drafted to reflect this. While every attempt should be made to normalise the playing field between internal and external bidders, there are some aspects of compliance that the internal bid will have an advantage in, for example, knowledge of the organisation, security issues, no profit motive. In addition, the internal bid would not have to demonstrate compliance with all provisions of the contract since it is not a separate legal entity. On other aspects, the internal bid may have a disadvantage, for example, lack of broad experience, access to up-to-date trends, management ability, performance monitoring and reporting.

For most purposes, however, an internal bid can readily be evaluated against external offers.

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

The material in this briefing is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact the Legal Practice before any action or decision is taken on the basis of any of the material in this briefing.

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