COVER SHEET Timbrell, Greg and Hirschheim, Rudy and Gable, Guy G. and Underwood, Alan (1998) Government IT and T Insourcing/Outsourcing: A Model and Guidelines. In Edmundson, Bob and Wilson, David, Eds. Proceedings 9th Australasian Conference on Information Systems 2, pages pp. 672-684, Sydney. Accessed from: http://eprints.qut.edu.au/archive/00004491
Government IT&T Insourcing / Outsourcing: A Model and Guidelines Greg Timbrell,* Rudy Hirschheim,** Guy Gable* and Alan Underwood* *Information Systems Management Research Centre Queensland University of Technology Brisbane, Queensland, Australia [email protected]
**College of Business Administration University of Houston Houston, Texas, USA [email protected]
ABSTRACT This paper describes collaborative research commenced early in 1998 and being pursued in cooperation with the Queensland Government. It extends prior work by Hirschheim, R. & Lacity, M. (Beyond the Information Systems Outsourcing Bandwagon: The Insourcing Response, 1995; Information Systems Outsourcing: Myths, Metaphors and Realities, J. Wiley & Sons, Chichester, 1993) in the private sector, identifying Government specific contingencies, with emphasis on the outsourcing relationship and related contract structures. Comparison will be possible between the prior study and findings in the public sector. Preliminary findings will be available for presentation at ACIS’98.
Keywords – Outsourcing of IS [EL07] 2 BACKGROUND The Queensland Department of Premier and Cabinet reported in their 1997 Information Technology / Information Management Status Report that the Government spent $383.8M on information technology last financial year. A further $120M was spent on telecommunications. The Status Report also notes that 92% of mainframe services are outsourced to CITEC, a Queensland Government Business Unit (Information Planning Branch 1997). A 1997 Commonwealth report estimated that “the IT services 'in scope' for outsourcing represent about half of the Commonwealth's total IT expenditure of approximately $2 billion”(Commonwealth Report 1997). It is not Federal Government policy to outsource but agencies are expected to test the market as a way of achieving savings of $100M by the year 2001(Budget Paper 2 1997-8). It is of national interest to examine this phenomenon and maximise its effectiveness as Government outsourcing grows to a potential $1 Billion Dollar business. 2.1 Outsourcing in Government There has been consistent growth in the outsourcing of information systems by the Queensland and Federal governments over the last few years (Budget Paper 2 1997-8, Information Planning Board 1991-8). Recognising this trend, in 1997 the Information & Procurement Division of the Department of Public Works and Housing, in conjunction with Queensland Health, commissioned a project to develop best practice guidelines for the outsourcing of information systems by Queensland Government agencies. At the end of 1997, the Division published a three part publication entitled "The Queensland Government Guide to Best Practice in IT Outsourcing" (Information & Procurement Division 1997). This publication provides high level guidance in three stages of outsourcing: (1) Making the Decision, (2) Establishing the Arrangement, and (3) Implementing and Managing the Arrangement. The Queensland Government aims to further develop these guidelines for second generation and more sophisticated users, thereby increasing control and independence of outsourcing projects and reducing development costs. 2.2 Aims of the Research The aim of this research is to build on previously identified theoretical models and academic case study analysis undertaken in the area of outsourcing in the private sector in order to develop practical advice and tools for use within Government.
The research questions to be explored are: 1. How does public sector outsourcing differ from private sector outsourcing? 2. What are the principal business drivers in public sector outsourcing? 3. What is the best contract / relationship structure for Government and Vendor? 4. When should insourcing be considered in Government? 5. Does outsourcing constrain Government organisational flexibility? The Queensland Government aims to use the research results to advise its IT&T management, and management of other Government jurisdictions, through a series of practical publications: 1. Developing and Evaluating Outsourcing Proposals in Government; 2. Precedent Contract Templates for use in Government Outsourcing Arrangements; 3. Best Practice advice across a range of Outsourcing issues including optimising the vendor / agency relationship; 4. IT efficiency opportunities which result in Insourcing bids winning Outsourcing contests.
3 RELATIONSHIP OF PROPOSED WORK TO PREVIOUS WORK Prior research has addressed several factors in outsourcing. This research has ranged across the outsourcing lifecycle however little or no attention in previous studies has been directed at the public sector. In the early 1990’s Rudy Hirschheim and Mary Lacity conducted a series of two, extensive multiple case studies of first, the outsourcing (1993a; 1993b; 1993c; 1994a; 1994b; forthcoming:a) and second, the insourcing (1995a; 1997; 1998; forthcoming:b; 1995b) experiences of 13 and 6 large, private sector U.S. organisations respectively. They based their work on two principle theories: Williamson's Transaction Cost Theory (TCT) and Pfeffer's political model. Transaction Cost Theory was used because a main determinant of executives outsourcing decisions was expected savings from the arrangement. Pfeffer's political model was used to provide a balancing view based on the political aspects of decision making in organisations. Further work was conducted by Alpar and Saharia (1995) on Transaction Cost Theory to examine ways of stratifying the type of arrangement (contract) that best suits individual outsourcing transactions. They look at features such as the specificity of the service / product including site specificity (resource immobility), physical asset specificity (technological advantage) and human asset specificity (know how). These elements in conjunction with coordination costs (search, contracting and coordination costs) assist in the determination of the contract form. The current contract form in Queensland is a standard set of terms and conditions that do not address specific outsourcing issues. The commercial consequence of this is that the Queensland Government, like other jurisdictions, is sometimes reliant on the vendor to draft the contract or is drafting in the absence of available precedents. There has been some attention to the decision to outsource, insource or smartsource and the choice of outsourcing vendor. Loh and Venkatraman (1992) examined both the business and IT perspectives. In essence what they and others consider in detail, is what drives a business to make an outsourcing decision. Business drivers in Government can differ from those that occur in private enterprise. In particular, Government must carefully consider the social and economic impacts of an outsourcing arrangement from a whole-of-state perspective. Lacity and Willcocks (1995) look several reasons why information technology outsourcing decisions are unique. These include 1) Information Technology evolves rapidly 2) the underlying economics of information technology changes rapidly 3) the penetration of information technology to all business functions is ubiquitous 4) the switching costs to alternative information technologies and information technology suppliers is high and 5) customers are often inexperienced with information technology Outsourcing. Earl (1996) considered the Risks of Outsourcing IT and developed a model of selective outsourcing to again support the outsourcing decision. Grover, Chong and Teng (1996) look at the types of outsourcing and conclude that success most often occurs when it involves the functions of ‘systems operations’ and ‘telecommunications’. They also examine the relationship issues of outsourcing partnerships such as trust, cooperation and communication and the effect these have on the success of the outsourcing arrangement. An issue to be considered in this study is whether the outsourcing of particular functions is somehow contingent upon the specific government environment eg. its size within a marketplace and the consequential effects of its outsourcing policy (and execution) within that marketplace. Clemons and Reddi (1994) looked at the Impact of IT on the degree of outsourcing, the number of suppliers, and the duration of contracts. These authors like many others use Transaction Cost Analysis to investigate how
outsourcing should be best structured to maximise its benefits and minimize costs. In decomposing transaction costs they examine the effects of coordination cost, operations risk and opportunism risk in outsourcing arrangements. From this analysis they model the profit function for different modes of economic organisation. The principle body of work upon which this project will be based is that conducted by Hirschheim and Lacity (H&L). Important issues arising from their work need to be explored, to ensure that Governments are managing their information technology and telecommunications investment responsibly. Hirschheim and Lacity suggest that in certain circumstances, IT&T services are more effectively provided internally (insourced). It is thus important to identify contingencies suggesting insourcing over outsourcing in the Government context. Hirschheim and Lacity suggest that consideration of business drivers should shape the outsourcing agreement. It is thus important to identify these drivers in government and to consider their political and economic feasibility. Hirschheim and Lacity further suggest that an arms length contract is the best contract structure as opposed to "partnerships with vendors" which have not worked well in the private sector. The issue thus is what structure a contract should take and the consequences of its structure to ongoing management. Lastly Hirschheim and Lacity observe how outsourcing can constrain organisational flexibility. This begs the question “how will outsourcing affect the delivery of Government services to the community?” Though Governments world-wide are moving to become more business-like, the preceding discussion has suggested the existence of differences between the private and public sectors that may influence outsourcing arrangements. It is thus necessary to identify these key differences and to understand their implications for IT&T outsourcing in Government. The following is a precis of the work by Lacity and Hirschheim (1993a; 1995a) based principally on Williamson's Transaction Cost Theory and Pfeffer's political model with reference to issues potentially unique to Government. Reference is also made to Gable’s (1992b) work on consultant engagement success factors, particularly as regards selecting the outsourcer and managing the relationship. 3.1 Business Drivers for Outsourcing The business drivers for outsourcing within an organisation can be financial, commercial, technical or political. An objective of this research is to evaluate whether the business drivers are the same in the public sector as they are in the private sector. If they are not the same, it is important to identify the differences, why the differences exist, and what effect these differences have on the outsourcing vendor, the outsourcing industry and the business relationship between the vendor and Government. Gable (1997) likens engaging an outsourcer to consultant engagement. He suggests that “Prior to commencing selection, clients should carefully consider their reasons for outsourcing expert assistance. The appropriate selection criteria in some situations will be contingent upon these Reasons. The clearer the client's understanding of their Reasons, the less likely they are to deviate from the more important criteria in selection.” Financial - The popular press has provided an impression that Outsourcing can lead to cost savings in the Information Systems function. The propensity to only report positive stories about an area is often because negative reports are generally unavailable to the popular press. Companies wish to keep their failures to themselves. This creates an impression in a decision-maker’s mind that costs in IS are avoidable through outsourcing. Loh and Venkrataman (1992) propose that a high level of business cost structure may motivate a firm to review the overall structure reflected in its physical infrastructure (such as plant and equipment), including its IT infrastructure. Some arrangements are not solely motivated by cost. Where cost is an important driver, transaction cost analysis is an appropriate tool to both benchmark current costs and measure resultant cost efficiencies from outsourcing. Applegate, Mcfalarne and MckKenny (1996) suggest that outsourcing is appealing because it offers an opportunity to liquefy the firm’s intangible IT asset, thus strengthening the balance sheet and avoiding a stream of sporadic capital investments in the future. In Government, funds from the sale of equipment may not be made available to the agency that is outsourcing for use in its other areas. This differs from many private sector models and emphasises cost saving in government business cases. Commercial - Massachusetts Blue Cross and Blue Shield’s decision to outsource to EDS was triggered by the failure of three major system development projects (and losses of tens of millions of dollars). It saw Outsourcing as a way to fix a broken department. (Applegate et al 1996). Many outsourcing initiatives driven by management derive from a focus on core competencies. In the Queensland Government this has extended to segregating the entire corporate services (including IT&T)
component of an organisation into a separate unit (The Corporate Services Agency) which services more than one agency (Primary Industries, Natural Resources). Separating information services from an organisation and introducing open competition for those services can change the IS function from a cost to a profit centre and drive efficiency through competition. Outsourcing the function is a variation of this type of arrangement. Technical - Large outsourcing vendors are able to entice considerable IS skills into their organisation. Also, outsourcing companies may employ newer technology than that of their prospective client organisation. Better skills and modern infrastructure will attract some agencies to outsource IS functions that are perceived to be lacklustre. TAFE Queensland have entered a ‘partnering / outsourcing’arrangement with Unisys to introduce and improve business process re-engineering skills in the organisation. CITEC regularly employ private sector technical people as contractors because of restrictive pay structures in Government. Alternatively, an organisation may outsource a legacy function while the current in-house staff are up-skilled on new technologies which replace that legacy function. This is a common strategy when implementing large new financial systems. Political - An outsourcing tender usually entails benchmarking the internal operations to support the evaluation of outsourcing proposals. An IS manager under pressure may bias this process to demonstrate that outsourcing the IS function will result in negative returns to the organisation (Hirschheim & Lacity, 1993a; 1995a). In Government decisions may be politically driven to enhance the IT&T industry or increase employment in a particular region. These short term strategies can be at the expense of marginally higher costs in a particular government function. Gable (1997) further suggests that “Consultants (outsourcers) too should attempt early in the proposal process, to identify the client's true reasons for seeking outside assistance. A clear understanding of the client's Reasons will help the consultant to focus their proposal on the relevant or more suasive selection criteria. The client's main Reasons should influence the consultant's proposed approach. An accurate perception of why the client is seeking outside assistance will help to maximise the "consultant's understanding of the client's needs" (the selection criterion rated most important by all respondent groups in Gable’s study (1997)). An appreciation of the client's views on selection criteria is of obvious value in marketing consulting (outsourcing) services. An improved understanding of client Reasons also can help the consultant (outsourcer) to anticipate and better understand problems encountered, and to work toward improved levels of client satisfaction. Similar items to those employed in Gable’s study, perhaps administered at the start of the outsourcing engagement or verbally administered during preparation of the RFP, may be useful in achieving several of the above objectives. 3.2 Choosing a Supplier Lacity, Willcocks and Feeny (1996) propose that Outsourcing technically immature activities engenders significant risk. Ironically these are precisely the IT activities that many senior executives want to outsource. This decision often proves disastrous because the companies are not in a position to negotiate sound contracts. Further they suggest that a second important technical consideration is the degree of integration with other business processes and technical systems. Saarinen and Vepsalainen (1994) propose a Procurement Principle for general information systems composed of three strategies. Their third strategy states that speculative investments are best left for internal development by innovators. This strategy would suggest that speculative or high risk developments should be Outsourced with care. Procurement is strongly controlled within Government within existing policy frameworks such as the Queensland Government State Purchasing Policy (1991). 3.3 Setting Up The Outsourcing Arrangement The purpose of formalising an outsourcing arrangement into a contract is to record the current and future responsibilities of each party and to propose various courses of actions under either predicable or unforeseen circumstances. A change in Government can bring about wholesale re-structuring of Government departments, affecting the scope of some outsourcing arrangements and causing several contract variations. The Queensland Government has found over the last six years of telecommunications facilities management with start up firms that promises made during the contracting period are not always operationally feasible. Under a tight contract regime, there is the flexibility by the outsourcing organisation to forgive contractual obligations. Where, on the other hand, fundamental obligations were not considered in the contract development, the outsourcing vendor comes cap in hand looking for additional fees (Opportunism).
Applegate et al (1996) say that a rigid deal that made sense at the beginning may make less economic sense three years later and require adjustments to function effectively. Further, they suggest that no matter how much detail and thought go into drafting the contract, the resulting clauses will provide imperfect protection if things go wrong. Indeed, the process of contract drafting (where one gains insights into the other’s values) is likely to be more important than the contract. 3.4 Implementing The Outsourcing Arrangement The implementation of an outsourcing arrangement encompasses a range of technical, human resource and business issues associated with the functions to be outsourced. Very importantly a recent court case Stones v Simplot (1996) demonstrated that employees who are transferred to an outsourcing vendor without the proper processes can give rise to a case of unfair dismissal against the outsourcing organisation. Pinnington and Willcock’s (1995) research findings suggest that IT directors need to investigate and agree with human resource directors the role of ‘home grown’ IS/IT specialists and business managers in the company. Once this is done, it will be easier to plan the competence development of IT specialists and IS/IT business managers and to formulate a coherent strategy for IS/IT outsourcing and insourcing. If the functions are already outsourced to a greater or lesser extent, the outsourcing organisation is conducting a 'transition out' from the legacy providers at the same time as conducting a 'transition in' to the new provider. The legacy provider could be less motivated than the new provider to transfer the functions resulting in cut-over issues. Little work has been discovered covering the transition issues from legacy providers to new providers. Recently the Queensland Government made a policy statement covering employment security and organisation change guidelines (Office of the Public Service 1997). The essence of the policy is that outsourcing should only be considered where sufficient effort has been made to improve in-house workforce productivity. The public sector work-force providing the functions have to be given the opportunity to prove their capability to provide the services. The response in a recent contract for outsourcing in the Queensland Government is an indemnity against industrial action arising from or affecting the implementation of an outsourcing arrangement. 3.5 Managing the outsourcing arrangement Contract Management encompasses some para-legal skills, commercial skills, knowledge of the arrangements and the ability to put one arrangement in the context of a potentially large number of arrangements. Whereas the Queensland Government telecommunications services were totally outsourced to Pacific Star five years ago, selective sourcing arrangements, consisting of between seven and ten contracts, are now in place to give the Government more control. Willcocks, Lacity and Fitzgerald (1995) found in their European and USA studies that an outsourcing contract is the only certain way to ensure that expectations are realised. In practice, weak contracting based on inadequate assessment of a vendor bid, and backed up by poor monitoring systems, not only results in unanticipated higher costs but can create major problems for client organisations. They also found parties all too frequently relying on partnering notions to offset any difficulties arising from loose contracting. Applegate et al (1996) consider the ongoing management of an alliance is the single most important aspect of outsourcing success. They maintain that the four critical factors for success are: 1) the CIO function (in particular the planning responsibility) 2) Performance measurements 3) the mix and coordination of tasks and 4) the Customer Outsourcer Interface. 3.6 Managing the Outsourcing relationship A premise of this study is that the client/outsourcer relationship is centrally important to success. Managing details of the arrangements is quite different from managing the relationship. Applegate et al (1996) say that the importance of the sensitive interface between the company and the outsourcer cannot be overestimated. Approximately 10 years ago, Gable initiated a study, the short title of which is "Consultant Engagement Success Factors" (CESF) (1991a; 1992; 1991b; 1996; 1997). The CESF study represents inter-disciplinary research aimed at better understanding client/consultant relations; the consultant engagement process; the IT consulting industry; factors important to successful IT consulting and management of IT consultants; and factors important to the successful export of IT consulting services. The CESF study analysed 150 software package selection projects involving external consultants. Gable suggests that the client/outsourcer relationship is akin to the traditional client/consultant relationship (1997) and that consulting is a form of outsourcing (outsourcing advice).
Review of the consulting literature reveals a relative dearth of rigorous empirical research on the outsourcing of IT advice. Yet, current trends toward alternative organisational forms and outsourcing have increased organisational reliance on external IT consultants who are better placed to remain current on state-of-the-art technology. Many outsourcing firms are, or have their origins in, a consulting firm and many would like their clients to consider them as consultants or partners, when negotiating business. Hirschheim and Lacity (1993a) suggest the more common client/consultant relationship is inappropriate; that the outsourcing relationship works best if at ‘arms length’ (1995a). They view the client/consultant relationship as being relatively more collaborative - working towards the same ends; whereas the client/outsourcer relationship represents a “moral hazard” or “zero-sum game”. This view is contrary to Gables’s findings on client involvement (1996; 1997) in consultant engagements. One possible explanation for this seeming contradiction is the need for multiple relationship types in outsourcing contracts that entail multiple relationships (eg. Benchmarking or BPR versus a long-term provision of operations). The nature of the closer collaborative work (ie. the consultant / client style of relationship) may be based on an alliance or partnership style of contract where risks and rewards are shared. The provision of services such as operations or other commodity style services may be better served by the traditional arms-length relationship. Regardless, consultants are regularly involved in the RFI/RFP/Proposal process and serve as specialist intermediaries between clients and the outsourcing vendor. Also, there are many similarities between consultant management and the management of outsourcing arrangements (Gable 1997). Thus there is a need to better understand the client/outsourcer relationship. There is also a need to consider the role of third-party consultants in the outsourcing arrangement and the management of the client/consultant relationship. Further, there is a need to consider characteristics of Government that may moderate these relationships.
4 RESEARCH PLAN The Queensland Government is facilitating access for the study team to IT management across the sector and will support their applications for access to IT management in other jurisdictions. Researchers will interview outsourcing organisations and will be given access, under strict confidentiality provisions, to relevant government and commercial documents. These documents would include policy statements, cost-benefit analyses, business cases, requests for offer / tenders, evaluation processes, contracts where available, contract management documents, dispute documents, transition plans and other relevant documentation. The sensitive nature of some of these documents may mean that they are only available to the team through the Queensland Government Partner Investigator. In certain cases the outsourcing vendor will be invited to provide source material for the study. The study includes five main phases. Phase 1 is in progress. The team starts with a strong knowledge and direct experience of key referent topic areas including IT&T outsourcing, information systems management, consultant selection and engagement and the consulting process, relationship management and industry/academia alliances. The study essentially entails a pilot case study followed by a multiple case study in Queensland Government and aims to extend this to further multiple case studies in other jurisdictions. Case study methods and research mechanisms as espoused by Yin (1994), Gable (1994) and Miles & Huberman (1994) and as structured by Pocknee, Fraser & Gable (1997) are being applied. 4.1 Phase 1 – Preliminary Work Main activities in this preparatory phase include: confirm access to target case study organisations (ongoing, as can take time to negotiate); review of the H&L case study database; review of the H&L case study method and instruments; review of H&L literature-base; update literature-base; confirm study questions and hypotheses; and detailed project planning. Most of the research activity will be case studies conducted in the field. There will be a significant qualitative data collection activity both in the initial investigative stages and in the analysis and validation phases. 4.2 Phase 2 – Identify Key Issues and Differentiating Factors In order to further relate this study to the H&L work the data collection will commence by exploring: Senior management's views on outsourcing, Business drivers/objectives for outsourcing in Government, the evaluation of outsourcing bids, the occurrence of insourcing options being adopted, the development and management of contractual arrangements, and the Government / vendor relationship. This early work aims to identify key issues and differentiating factors in Government IT&T Outsourcing that will
help to refine the overall research strategy and context. A major output of phase 2 will be a draft case study protocol, reflecting emphasis on key issues, possible government moderators and specific hypotheses derived from the theory (transaction cost and political). 4.3 Phase 3 – Pilot Case Study Public Works and Housing Next a pilot case study can be commenced with a reasonably complete protocol, ready for testing. Given the Partner Investigator’s excellent access to information on the Queensland Government’s voice telephony facilities management agreement, this will serve as the focus of the pilot. 4.4
Phase 4 – Multiple Case Study: IT&T Outsourcing Practices in Queensland and Federal Government Agencies In this, the longest phase, the pilot case study will be extended and combined with further case studies of the IT&T outsourcing experiences of targeted Queensland and other Government agencies. Early hypothesis testing through pattern-mapping as data is gathered during this phase, will suggest formal extensions or variations to the models and possible areas of increased focus. 4.5 Phase 5 – Analysis and Outputs The study team will collaborate with the relevant areas in the Queensland Government to produce the aforementioned deliverables to Government. Lower and more detailed levels of analysis, with closer attention to linkages between theory-questions-evidence-interpretation-implications, is expected to produce publishable academic journal and conference articles. In this final phase, the practitioner and academic deliverables are revisited in light of findings from detailed analysis.
5 CONCLUSION Queensland is the first jurisdiction in Australia to view the funding for information technology infrastructure as equally important to funding for road, rail and ports infrastructure (The Queensland Government) in the development of the State (Note that this differs from a strategy to grow the information industry locally). The proposed enhanced outsourcing guidelines will be of considerable value to the Queensland Government. The growth of outsourcing opportunities requires that IT managers further develop their skills to manage the development and evaluation of outsourcing bids from vendors. As outsourcing becomes more competitive and there are more arrangements to manage, contract development skills and tools such as the proposed precedent contract, will be in demand as will contract management and relationship guidance. The paper has presented pilot work to date. The extent of this study is dependent upon resources available. Funding is being sought from both the Queensland and Federal Govenments.
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