Legal Practice Briefing No. 27

Number 27

28 August 1996

COMMONWEALTH IT OUTSOURCING

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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