Initial Comment: I declare that this assignment is based on my own work and that all material previously written or published in any source by any other person has been duly acknowledged in this assignment.
The Outsourcing Trend
Outsourcing is becoming more prominent in the IT industry. Organisations are focusing on core business and are wishing to achieve large cost savings. Recommendations for a successful outsource include establishing a flexible contract, forming a partnership and clearly identifying scope and responsibilities.
Introduction
The massive move to outsourcing presents a series of new challenges for organisations, both public and private. With the increasing demands on organisations to gain greater access to cutting-edge technologies, to highly skilled people and to exit non-core activities, organisations are seeing IT outsourcing as the way forward. The Government has also realised that outsourcing of their IT functions will provide improved service levels and has the potential to delivery large savings. But what is this concept of outsourcing and why is it becoming so popular amongst IT Managers? How does an organisation implement a successful outsource? In this paper I will examine the origins and reasons for outsourcing and in particular the Government IT outsourcing Initiative. Finally, a number of recommendations will be discussed.
What is Outsourcing ?
Outsourcing is the activity of contracting other specialised companies to perform the business processes that organisations can't or do not wish to undertake themselves. Traditionally, IT outsourcing has involved an external service provider being engaged via a formal contract to deliver part or all IT functions to achieve specified results. The contracts are usually for a fixed price and for a specified period of up to ten years. Services that are outsourced vary greatly, being based upon the requirements of each organisation. These services include transcribing and typing services, IT service/help desk, data entry, word processing, LAN/WAN management, desktop services, mainframe operations, web hosting and application management and support.
Why Outsourcing ?
There are many reasons why private and public sector organisations decide to outsource it. The most compelling benefit of outsourcing is cost savings, which, by some estimates, is 20 to 40 percent less than the expense of maintaining the same function or process in-house (Uiterwijk, 1999). In addition, a service provider can usually free up internal IT management, allowing them to focus on their core business. In her article, Han states (Han (1), 2000) that ‘…outsourcing also brings improved economies of scale, efficiency, speed of service delivery and in-house "innovation" to companies' . In addition, she indicates that organisations are struggling to understand the e-business rationale, and that outsourcing may be the way to catch up to their competitors. Other commentators indicate that outsourcing plays a major role in reducing head count and moving people off the payroll. This has the flow on benefit of reducing real estate on-costs, as organisations are able to use other companies' facilities. Many, such as FreightCorp, state that their IT outsource is part of a wider IT strategic plan. Others, such as NRMA, indicate that they ‘…needed assistance with systems consolidation and infrastructure integration as a result of recent mergers... ' (Cresswell (2), 1999). They also indicated that the ‘"strategic goals" of the project included the staffing issue, as well as managing the NRMA's complex computing environment.' Hong Kong-based Cathay Pacific state that ‘We are not experts in technology, but we are experts in providing a first-class airline service' (Uimonen, 1999). There are also benefits for employees. The ‘big-time' IT services companies can afford higher salaries, better training, additional career options and provide an opportunity to work with ‘bleeding-edge' technologies. Australian IT outsourcing has been growing at an incredible rate, with an expenditure of $30 billion expected this year (Han (1), 2000).
Government IT Outsourcing
Introduction
In 1995 the Federal Government outlined a broad vision for future IT&T service delivery in what was to become known as the Whole of Government Information Technology Infrastructure Consolidation and Outsourcing Initiative . At that time IT was the largest segment of the Government's demand for outsourcing services. The cabinet declared its intention to be a world leader in government administration and the cost-effective provision of affordable, equitable, and accessible information and services to Australians (OGIT, 1995, p39). The policy, managed by the Department of Finance and Administration (DoFA), had a number of objectives, including effective IT&T support of agency business needs; economies of scale; enhanced effectiveness, due to standardised operating environments; efficient use of processing capacity and better services at lower costs; and leveraged access to private sector technology and expertise. Most importantly, significant industry development objectives were to be achieved through the IT Infrastructure Initiative, including growth in the Australian IT&T industries; promoting their competitiveness; and addressing employment and development needs (OGIT, 1995, p39). The outsourcing initiative was announced as part of the 1997/98 budget and was designed to improve the structuring and sourcing of IT services across Government agencies, leading to significant savings. It aimed to streamline all IT services through a common procurement system, where an outsourcing provider would have an end-to-end responsibility over the servicing and maintenance of Government IT systems. “The provision of IT to government is something that can be done better outside government.” (Alston (1), 1999) The scope of the initiative includes mainframe, midrange systems, distributed and desktop operations, support services and data networks. In addition, individual agencies have the choice include voice telecommunications services and applications development and support in their tenders. The Department of Communications Information Technology and the Arts (DoCITA) was tasked with the competitive tendering processes, contract management and monitoring the outsourcing provider's compliance with agreed commitments throughout the life of the contract.
Performance of Government IT Outsourcing
At the outset of the Government IT Outsourcing Initiative, the Government clearly indicated that their Initiative would provide the benefit of ongoing cost savings. It was estimated that the Australian Tax Office IT outsourcing contract would deliver savings in the order of $100 million (Alston (1), 1999). Also, the three Health Agencies (Health and Aged Care, Medibank Private and Health Insurance Commission) expected savings in the order of $54million (Alston (2), 1999). Even at the State level, the South Australian Government planned to save taxpayers more than $100 million over nine years.
Recommendations for Successful Outsourcing
IT Managers in Government agencies should focus on achieving a successful outsource for their organisation. IT Managers should take a more ‘corporate' approach and focus on the role, and the impact of IT their on business practices, or the impact of IT outsourcing on their customers. They should work towards ‘ implementing the latest technology that will achieve [or improve] performance and cost objectives' (Jones, 2000). To make sensible decisions about outsourcing IT services, the scope and boundaries of every component of the service needs to be accurately defined and quantified. IT Managers need to break down what services they currently provide, profile how these consume available resources, and derive a cost per hour, end or service. This then provides a base-line for comparison against vendors pricing. Once a clearly defined scope has been developed, value-add services should also be considered. As the former Department of Social Security discovered during a post-contract analysis (Unknown Author, 1997), ‘…it would have been more beneficial having contractors design, deliver and operate the system so they had total responsibility for the system for a period of time. Additionally, the provision of support services and training would have facilitated more rapid adaptation to the new equipment.' Another factor which is vital for a successful IT outsource is a clear understanding of the required outcomes and objectives, as these ‘…must be clear for the vendor to deliver efficiently' (ComputerWorld Today Staff, 2000). As this is a two-way process, it is advisable to clearly specify the accountabilities and responsibilities of each of the parties involved. In many cases this lack of mutual understanding has lead to a major incident, resulting in finger pointing from each side. This situation should, and can easily, be avoided through clear and effective communication. In order to quantify and monitor the achievement of the objectives and the success of the contract, metrics and realistic and workable service levels are required. Young (1999) indicates that it is vital to ‘put in place realistic service levels and get both sides to understand them.' Establishing a flexible contract is also highly beneficial, as the contract will not be outgrown by changing business needs, a shift in Government policy or developments in technology. Bushell and Walsh (1999) recommend that the contract should be flexible and it should have a clear escalation and change management process built-in, which will allow for future negotiation in the event of variations. Alternatively, a partnership arrangement should be investigated. In the classic outsourcing model, all the risk shifts to the external service provider, who is left to manage scope, budget, and delivery. In a partnership model, by contrast, both the IT Manager and the external service provider take some responsibility and accountability for scope control (Bushell, 2000). The workings of such an arrangement are fairly simple in concept. When incentives and penalties apply and potential savings are shared, there's more chance the vendor's performance will meet expectations. The benefits of a partnership arrangement are that the two parties identify areas where they could work together to solve common issues, and to find opportunities where the respective strengths of the two organisations could create mutual gain, by gaining a thorough understanding of the strategic goals and objectives of the other side (Bushell, 2000). The final issue that promotes successful outsourcing is the integration of the outsourcer into the organisation. This willingness on both sides to establish methods and conventions allows a closer working relationship and promotes innovative processes and tools that result in effective management. This team approach also facilitates seamless channels of communication between the end users and the outsourcing vendor to resolve routine issues, resulting in increased satisfaction at all levels.
Conclusion
With the advent of E-business organisations need to become and remain flexible as the wishes of their customers, and the markets in which they operate, constantly change. Organisations are also being challenged to meet their current and future technological needs in a cost-effective manner. As a result, outsourcing is seen as the best way forward. Through the Whole of Government IT Outsourcing Initiative, the Government has also identified the need to focus on their core business, being attracted by the anticipated savings, for the anticipated benefits were in the millions. Through examination of these issues, this paper recommends a number of ideas. IT Managers should put aside the performance to date and strive to achieve the optimum for their organisation. To facilitate this, a focus on the relationship with the outsourcer, the establishment of clear objectives and scope and the establishment of a flexible contract are required. There will always be disagreements over Government outsourcing , just as there will probably always be disputes over what the role of government should be in our society. Regardless of these arguments, the Whole of Government IT outsourcing Initiative will be in place for some time to come, bearing in mind an ideal performance and serious cost savings involved.
Bibliography
Alston, Senator the Hon Richard - Minister for Communications, the Information Economy and the Arts (1999): I.T. project saves $100 million , Media Release.
Alston, Senator the Hon Richard - Minister for Communications, the Information Economy and the Arts (1999): IT&T boost for health agencies , Media Release 55/99.
Alston, Senator the Hon Richard - Minister for Communications, the Information Economy and the Arts (1999): Australian S.M.E. preferred tenderer for large I.T. outsourcing contract , Media Release.
Baukney, Heather (1999): Can We Share , IDG Web Site.
Bell , Stephen (2000): Outsourcing rates a positive picture , ComputerWorld Web Site.
Bridis, Ted (1999): EPA's computers are wide open to hackers, investigators report , The Wall Street Journal.
Bushell, Sue (1998): Acer, Ipex big winners in Government summary , ComputerWorld Web Site.
Bushell, Sue (1998): Finance adds to outsourcing dimension , ComputerWorld Web Site.
Bushell, Sue (1998): SMEs have "fair opportunity" in small agency tenders, Fahey says , ComputerWorld Web Site.
Bushell, Sue (2000): Tying the Knot , IDG Web Site.
Bushell, Sue, & Walsh, Stephen (1999): Devil in the Detail , IDG Web Site.
Bustos, Luisa (1999): Outsourcing to increase uptime at bank , ComputerWorld Web Site.
Clift, Terry (1999): The tale of the wizard of Oz , ComputerWorld Web Site.
Collett, Stacy (1999): Study: Net demand will drive outsourcing to $165b , ComputerWorld Web Site.
ComputerWorld Staff writers (2000): IBM GSA tops local services market: IDC , ComputerWorld Web Site.
ComputerWorld Staff writers (2000): Senate committee uncovers blunder in Federal Government outsourcing deal , ComputerWorld Web Site.
ComputerWorld Today staff (1998): Com Tech chases lucrative government contracts , ComputerWorld Web Site.
ComputerWorld Today staff (2000): User says money no reason to outsource , ComputerWorld Web Site.
Cresswell, Ellen (1999): Ipex scores $130 million govt contract , ComputerWorld Web Site.
Cresswell, Ellen (1999): NRMA outsources infrastructure to IBM GSA , ComputerWorld Web Site.
Cresswell, Ellen (1999): Outsourcing's big three may tumble , ComputerWorld Web Site.
Farrell, Jonathan (2000): Blame the outsourcing vendors , ComputerWorld Web Site.
Field, Tom (2000): I.S. Outsourcing : High Anxiety , ComputerWorld Web Site.
Fitzsimmons, Caitlin (1999): CSC teams up with CWO , IDG Web Site.
Gattari, Ingrid (1999): Outsourcing Dialog opens in Top End , ComputerWorld Web Site.
Han, Helen (2000): Analyst: Non-strategic functions should be outsourced , ComputerWorld Web Site.
Han, Helen (2000): Relationships the bottom line of outsourcing , not cost , IDG Web Site.
Hilvert, John (1997): Canberra 's winter of discontent , ComputerWorld Web Site.
Hilvert, John (1997): Resellers prepare for outsourcing bloodbath , ComputerWorld Web Site.
Ireland , Steve (1998): Should Johnny Outsource , IDG Web Site.
Jackson, Naomi (1998): Application outsourcing represents a danger , ComputerWorld Web Site.
Jacobs, Paula (1997): The outsourcing option , ComputerWorld Web Site.
Jones, Mark (2000): EDITORIAL: Show me the (wasted) money , ComputerWorld Web Site.
Kaye, Byron (2000): Australian outsourcing outpacing the world , IDG Web Site.
Lai, Winnie (2000): Firms slow to adopt outsourcing , ComputerWorld Web Site.
Mack, Merri (1999): Fahey sets the record straight on IT outsourcing , ComputerWorld Web Site.
Mason, Laura (1998): End outsourcing contracts with painless approach , ComputerWorld Web Site.
Mason, Laura (1998): FreightCorp to outsource , ComputerWorld Web Site.
Mason, Laura (1998): Toyota Australia goes for selective outsourcing , ComputerWorld Web Site.
Mason, Laura (1999): ATO's $400m IT contract goes to EDS , ComputerWorld Web Site.
Meyer, Dean (1999): Before throwing money at outsourcing , look deep inside , ComputerWorld Web Site.
Mitchell, Selina (2000): Howard's letter puts tenders in doubt , IDG Web Site.
Munro, Rebecca (1999): Finding the right focus , ComputerWorld Web Site.
Noone, Richard (1999): Customer Call: The decision-makers , ComputerWorld Web Site.
Noone, Richard (2000): IDC: Outsourcing explosion only temporary , ComputerWorld Web Site.
Office of Government Information Technology (OGIT) (1995): Whole of Government Information Technology Infrastructure Consolidation and Outsourcing Initiative , OASITO Web Site.
Sim, Philip (1999): Outsourcing the hottest services business , ComputerWorld Web Site.
Sinclair, Jenny (2000): Scientists aim to do IT in-house , IDG Web Site.
Stephen, Sid (2000): Eye on the Prize , ComputerWorld Web Site.
Tomes, Cameron (1999): Beware the shrewd outsourcer: analyst , ComputerWorld Web Site.
Uimonen, Terho (1999): Two sides to currency crisis, ComputerWorld Web Site.
Uiterwijk, Julie (1999): Product of the Year: Outsourcing , ComputerWorld Web Site.
Van Bentum, Peter; Boin, Ramon; Braun, Ronald; Dijkstra, Patrick & Ravenhorst, Kees (2000): IT Organisations need outsourcing to grow , OutsourcingAustralia.com.
Van Dijk, Sandra (2000): Outsourcing Costs, Savings Lost, Says Audit Report , IDG Web Site.
Van Dijk, Sandra (2000): Audit Examines Budget Blowouts in Feds' Outsourcing , ComputerWorld Web Site.
Van Dijk, Sandra (2000): 'Blunders' force govt to defend outsourcing deals , ComputerWorld Web Site.
Van Dijk, Sandra (2000): CSIRO Protests , ComputerWorld Web Site.
Van Dijk, Sandra (2000): CSIRO scientists slam IT outsourcing , plan strikes , ComputerWorld Web Site.
Van Dijk, Sandra (2000): Outsourcing blunders leave vendors mute , ComputerWorld Web Site.
Warneminde, Cass (1999): Outsourcing not a bottom line bonanza: Meta Group , ComputerWorld Web Site.
Winterford, Brett (2000): IT staff anger over outsourcing , IDG Web Site.
Young, Peter (1999): Govt IT outsourcing sparks staff backlash , ComputerWorld Web Site.
