The Professional's view of IT Outsourcing

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Draft of 28 October 1997: The content of this talk will be developed here. Suggestions and comments welcome: tom.worthington@tomw.net.au

Contents

• Introduction
• Paper Preparation and Senate Hearing: May to September 1997
• The Paper
• References

In December last year I gave an address to the National Press Club on "Australia's 'Net Futures" (12). In this I raised the question as to if outsourcing was just the latest management fad from overseas:

However, before dismantling our public infrastructure and selling it off to overseas interests, we should examine if outsourcing really works and if some non-commercial benefits are lost. These arguments apply to outsourcing by both private and public sector organisations. While professing support for free trade, all national Governments support their local industries. One way this can be done is by funding research, another is by using the government agencies to train staff, test technology and support local industry. Before Australia abandon these mechanisms, we should make sure our competitors are doing the same and playing the game fairly. (13)

This presentation is intended to give an overview of IT outsourcing as it affects the IT professional, including ethical and legal issues. I have prepared a background to and summary of a study of outsourcing (1) commissioned by the ACS evidence presented to the Senate Finance and Public Administration References Committee IT Outsourcing inquiry by Ian Dennis and myself.

Since April I have sent or received 294 messages on the topic of outsourcing, have appeared before the Senate and have been interviewed by radio and the press. While I do not claim to be an expert on outsourcing, I will make a few observations:

• Whole of government IT outsourcing is a high risk approach: There are risks due to the large scale, long lead times, potential loss of services across government and differences in agency requirements. There may be difficulties in the Australian IT industry absorbing large outsourcing contracts. Other approaches might be used to achieve the desired cost benefits, with lowers risks and to permit the Australian IT industry to benefit.
• On-line Preparation Works: Apart from the copy submitted to the Senate, there were no paper copies of the ACS paper, it was done on-line and the process worked. The ACS was able to prepare a detailed paper on a complex paper in a relatively short time. Members of the press commented on the benefits of having the detailed paper immediately available, with links to background material.
• Democracy works: The Senate inquiry process was useful in bringing out and analysing public policy issues in outsourcing.
• Outsourcing can work, if done right: The clear message is that outsourcing can work if done right. The issues which are important any time: standards, professionalism, documentation; are even more important with outsourcing.

In response to growing concern from members I put a proposal in May 1997, for the ACS to provide advice to members on outsourcing issues. The ACS Management Committee endorsed this proposal on 13 May 1997. This coincided with the release of the 1997 Federal Budget, which included estimated cost savings (2) based on outsourcing (euphemistically called "Efficiencies in Whole of Government Information Technology Infrastructure"), of $38.1 Million (1998-99), $89.5 million (1999-00) and $103.5 million (2000-01).

On Wednesday, 21 May 1997 an Outsourcing "Hypothetical" (3) was held at a joint ACS/SQA/SPIN meeting in Canberra. This explored issues with outsourcing, using a panel of experts playing the roles of IT Manager, IT Quality Manager & OGIT Representative, IT Auditor, Process Improvement Manager and Corporate Manager. This was very useful in stimulating thought on outsorcing issues. My insight from the event was that the issues of documentation, software quality, software metrics, standards and ethics, which seemed of little value in the day to day workplace become very important in IT outsourcing. If you are going to outsource something, you need to know what it is, how much of it there is, how good it is, who should do what and who you can sue if they don't do it right.

On Tuesday 27 May the Senate referred information technology outsourcing to the Senate Finance and Public Administration References Committee (4), with a reporting date of 25 August. The ACS had been providing copies of its work on outsourcing to the committee secretariat and made some suggestions as to who in the IT industry would be useful to talk to.

28 to 30 May I visited South Australia for the ACS AGM. I talked to government and industry IT people. One of my research questions for this trip (5), was:

Are there any lessons for Federal Government Outsourcing from the South Australia Government's experience?

When I visited South Australia, a year before, I talked to EDS, who had just won the South Australian contract. There was surprisingly little interest in the issue in South Australia this time.

On Tuesday 24 June, Ian Dennis, a newly elected fellow of the ACS and David Goble, MACS, both of Whitehorse Strategic Group Ltd, agreed to prepare the ACS position paper. I wrote them the one page brief for the work, which I had prepared in consultation with the ACS Council.

The brief gave them three weeks to write a four page document to provide advice to IT professional members of the ACS on issues to consider in preparing for and working with outsourcing. A secondary purpose is to provide a submission to the Senate Committee.

Ian and David met the deadline and almost met the space limitation (producing about six pages, rather than four). I issued a draft for comment on-line 4 July (6) and a media release 11 July (7).

ABC Radio National's Background Briefing program on Sunday 13 July entitled "IT Outsourcing" (8) looked at South Australian and overseas experience as an indicator towards the Federal Government's whole of government outsourcing.

The program featured well reasoned arguments (some from people featured in the ACS paper), on the need for the client to understand their requirements and negotiate the contract accordingly.

I issued a second draft of the ACS paper on 27 July (9).

With some minor editing, the final version of the ACS paper was issued on 6 August (10). The ACS made a submission to the Senate committee the same day. The submission consisted of a one page letter (11) and a copy of the paper. As the committee secretariat was reluctant to accept an electronic submission, I printed out a copy. This was about the first copy I had to print after weeks of discussions, drafts and hundreds of comments.

On 1 September the Senate Committee formally invited the ACS to give evidence at a public hearing on Friday 5 September. Ian Dennis FACS and myself appeared for the ACS.

This was my fourth appearance before a parliamentary committee and a relatively easy one. As well as several ACS members in the audience providing moral support, there were members of the IT media who are generally supportive of the ACS. Two of the Senate committee I had met. One of the academics giving evidence Dr Edward Lewis (ADFA) contributed to the ACS paper.

The Australian Electrical and Electronic Manufacturers' Association put a case for government intervention. The ACS put its case, receiving a very sympathetic hearing from the committee. There was particular interest in the recent Goldsworthy report. It was very soon clear that the issue of concern to the Senators was JOBS and the effect outsourcing might have.

The heavy questioning was reserved for representatives of the Department of Industry, Science and Technology and Dr. Andy McDonald, Chief Government Information Officer. The issue was what industry development considerations had been included in proposals for government IT Outsourcing. It was difficult to not get the impression that if this hadn't been considered by DIST or OGIT before, it would be as a result of the questioning.

Dr Edward Lewis, Senior Lecturer, School of Computer Science, Australian Defence Force Academy and Professor Peter Weill, Director, Centre for Management for Information Technology, Melbourne Business School provided an experts view. Overall the ACS's paper stood up well in terms of the issues raised during the day. At the end of the hearing I issued a media release (14), complete with this digital photo, from Parliament House. The full transcript is available in Hansard (15).

With the Senate hearing over, that was about the end of the process for the ACS paper and myself, apart from numerous media enquiries. But what was actually in the ACS paper?

• 13 May 1997: ACS decides to provide advice to members on outsourcing
• ?? May 1997: Federal Budget, estimates cost savings by outsourcing of $38.1 Million (1998-99), $89.5 million (1999-00) and $103.5 million (2000-01). (2)
• 21 May 1997: Outsourcing "Hypothetical" (3) by ACS/SQA/SPIN
• 27 May: IT outsourcing referred to the Senate Finance and Public Administration References Committee (4)
• 28 to 30 May: I visited South Australia looking at outsourcing (5)
• 24 June: Ian Dennis FACS and David Goble MACS agreed to prepare the ACS paper
• 4 July: Draft for comment issued on-line (6)
• 11 July: media release issued (7).
• 13 July: ABC Radio National's Background Briefing on "IT Outsourcing" (8)
• 27 July: Second draft of the ACS paper issued (9).
• 6 August: Final version of the ACS paper issued (10) & ACS Senate submission (11)
• 5 September: ACS gave evidence at a public hearing (15) & issued a media release (14)

Definition of Outsourcing

Reasons For Outsourcing

• Cost Savings: However, economies of scale may have changed for IS.
• Focus On Core Business
• Access To Skills
• Access To Technology
• Flexibility
• Accountability

Critical Issues with Outsourcing

• Transaction Costs
• Hidden / Additional Costs
• Lack of Flexibility
• Loss of Control
• Human Resource Problems
• Lock-In, Vulnerability and Dependence:
• Privacy and Confidentiality
• Intellectual Property and Competition
• Opportunity Cost

ACS Member involvement